##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K



| |  | [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| |  | ----------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2000



| |  | [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| |  | ----------------------------------------------------------------------------------------------

For the Transition Period From _______ to _______.

Commission File Number: 811-3780

PMC Capital, Inc.
(Exact name of registrant as specified in its charter)

|                                                                                  |  |                                                
|--------------------------------------------------------------------------------- |  | -----------------------------------------------
|Florida                                                                           |  | 59-2338539                                     
|                                                                                  |  |                                                
|(State or other jurisdiction of
                   incorporation or organization) |  | (I.R.S. Employer
           Identification No.)
|                                                                                 
|18111 Preston Road, Suite 600, Dallas, TX 75252                                   |  | (972) 349-3200                                 
|                                                                                  |  |                                                
|(Address of principal executive offices)                                          |  | (Registrants telephone number)                

Securities registered pursuant to Section 12(b) of the Act:Common stock, $.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]  NO [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 15,
2001 as reported on the American Stock Exchange, was approximately $85 million.
Common Stock held by each officer and director and by each person who owns 10%
or more of the outstanding Common Stock have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of March 15, 2001, the Registrant had 11,853,516 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrants Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the year covered by
this Form 10-K with respect to the Annual Meeting of Shareholders to be held on
May 16, 2001 are incorporated by reference into Part III.





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TABLE OF CONTENTS



|                                                                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                              
|                                                                                                     | Item 1. BUSINESS                                                                             
|                                                                                                     | Item 2. PROPERTIES                                                                           
|                                                                                                     | Item 3. LEGAL PROCEEDINGS                                                                    
|                                                                                                     | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                                                             
|                                                                                                     | Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS             
|                                                                                                     | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                                                                     | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|                                                                                                     | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                                                     | Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             
|                                                                                                     | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                                                                            
|                                                                                                     | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                                                                     | Item 11. EXECUTIVE COMPENSATION                                                              
|                                                                                                     | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                                                                     | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                                                                     | Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                                                          
|INDEX TO FINANCIAL STATEMENTS                                                                       
|SUMMARY OF SELECTED FINANCIAL INFORMATION                                                           
|QUARTERLY STATISTICS                                                                                
|Report of Independent Accountants                                                                   
|FINANCIAL HIGHLIGHTS                                                                                
|CONSOLIDATED BALANCE SHEETS                                                                         
|CONSOLIDATED SCHEDULE OF INVESTMENTS                                                                
|CONSOLIDATED STATEMENTS OF INCOME                                                                   
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
|CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998         
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                          
|Report of Independent Accountants
on Consolidating Financial Statements                             
|CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000                                                       
|CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000                              
|CONSOLIDATING STATEMENT OF SHAREHOLDERS EQUITY                                                     
|CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000                         
|EXHIBITS                                                                                            
|EX-4.33 Senior Note - $10,000,000                                                                   
|EX-4.34 Debenture - $4,310,000                                                                      
|EX-4.35 Debenture - $3,000,000                                                                      
|EX-10.1 Employment Contract-Lance B. Rosemore                                                       
|EX-10.2 Employment Contract-Andrew S. Rosemore                                                      
|EX-10.4 Employment Contract-Jan F. Salit                                                            
|EX-10.5 Employment Contract-Barry N. Berlin                                                         
|EX-10.6 Employment Contract-Mary J. Brownmiller                                                     
|EX-10.7 Revolving Credit Facility-3/22/00                                                           
|EX-10.11 Employment Contract-Cheryl T. Murray                                                       
|EX-21 Subsidiaries of Registrant                                                                    



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PMC Capital, Inc.
Form 10-K
For the Year Ended December 31, 2000

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PART I

|                     |  |                                                                                       |     |      |    |  |  |  |  | 
|-------------------- |  | ------------------------------------------------------------------------------------- | --- | ---- | -- |  |  |  |  | 
|ITEM                 |  |                                                                                       |     | PAGE
|                     |  |                                                                                       |     |     
|1.                   |  | Business                                                                              |     |      | 2  | 
|                    
|                    
|                    
|                    
|2.                   |  | Properties                                                                            |     |      | 16 | 
|                    
|                    
|                    
|                    
|3.                   |  | Legal Proceedings                                                                     |     |      | 16 | 
|                    
|                    
|                    
|                    
|4.                   |  | Submission of Matters to a Vote of Security Holders                                   |     |      | 16 | 
|                    
|                    
|                    
|                    
|                    
|                     |  | PART II                                                                              
|                    
|                    
|                    
|                    
|                    
|5.                   |  | Market for the Registrants Common Stock and Related Shareholder
Matters              |     |      | 17 | 
|                    
|                    
|                    
|                    
|6.                   |  | Selected Consolidated Financial Data                                                  |     |      | 18 | 
|                    
|                    
|                    
|                    
|7.                   |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |     |      | 19 | 
|                    
|                    
|                    
|                    
|7A.                  |  | Quantitative and Qualitative Disclosures about Market Risk                            |     |      | 31 | 
|                    
|                    
|                    
|                    
|8.                   |  | Consolidated Financial Statements and Supplementary Data                              |     |      | 31 | 
|                    
|                    
|                    
|                    
|9.                   |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |     |      | 31 | 
|                    
|                    
|                    
|                    
|                    
|                     |  | PART III                                                                             
|                    
|                    
|                    
|                    
|                    
|10.                  |  | Directors and Executive Officers of the Registrant                                    |     |      | 32 | 
|                    
|                    
|                    
|                    
|11.                  |  | Executive Compensation                                                                |     |      | 32 | 
|                    
|                    
|                    
|                    
|12.                  |  | Security Ownership of Certain Beneficial Owners and Management                        |     |      | 32 | 
|                    
|                    
|                    
|                    
|13.                  |  | Certain Relationships and Related Transactions                                        |     |      | 32 | 
|                    
|                    
|                    
|                    
|                    
|                     |  | PART IV                                                                              
|                    
|                    
|                    
|                    
|                    
|14.                  |  | Exhibits, Financial Statements, Schedules and Reports on Form 8-K                     |     |      | 33 | 
|                    
|                    
|                    
|                    
|Signatures           |  |                                                                                       | 34  |     
|                    
|                    
|                    
|                    
|Financial Statements |  |                                                                                       | F-1 |     
|                    
|                    
|                    
|                    
|Exhibits             |  |                                                                                       | E-1 |     

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##### Table of Contents






PART I




Item 1. BUSINESS

GENERAL

Overview

PMC Capital, Inc., a Florida corporation, is a diversified, closed-end
management investment company that has elected to operate as a business
development company (BDC) under the Investment Company Act of 1940, as
amended (the 1940 Act). The common stock of PMC Capital, Inc. (the Common
Stock) is traded on the American Stock Exchange under the symbol PMC. PMC
Capital, Inc. has elected to be taxed as a regulated investment company under
the Internal Revenue Code and thus distributes substantially all its taxable
income as dividends to its shareholders, thereby incurring no Federal income
tax liability on such income.

PMC Capital, Inc. (PMC Capital or PMC, and together with its
subsidiaries, the Company, we or our) is a national lender to small
businesses either directly or through our three principal subsidiaries. These
lending subsidiaries are First Western SBLC, Inc. (First Western), PMC
Investment Corporation (PMCIC) and Western Financial Capital Corporation
(Western Financial). First Western, PMCIC and Western Financial are
registered under the 1940 Act as diversified, closed-end management investment
companies. Our investment objective is to achieve current income that is
available to pay out to shareholders in the form of quarterly dividends.
During the years ended December 31, 2000 and 1999, we funded $44.2 million and
$84.3 million in loans, respectively. At December 31, 2000, serviced and
retained principal outstanding on our loan portfolio consisted of $307.7
million and $100.4 million, respectively.

We operate under several licenses from the Small Business Administration
(the SBA). First Western is licensed as a small business lending company
(SBLC) that originates loans through the SBAs 7(a) Guaranteed Loan Program.
PMCIC is a licensed specialized small business investment company (SSBIC)
under the Small Business Investment Act of 1958, as amended (SBIA). PMCIC
uses long-term funds provided by the SBA, together with its own capital, to
provide long-term collateralized loans to eligible small businesses owned by
disadvantaged persons, as defined under the regulations of the SBA. Western
Financial is a licensed small business investment company (SBIC) under the
SBIA that provides loans to borrowers whether or not they qualify as
disadvantaged.

We primarily originate loans to individuals and small business concerns in
the limited service sector of the lodging industry. We have a fundamental
policy with respect to loan concentration that requires us to be greater than
25% concentrated in the lodging industry. We also target the convenience store
and gas station, medical, restaurant, service, retail and commercial real
estate industries. We are a national lender that primarily lends to businesses
in the southwest and southeast regions of the United States. Our loans in the
lodging industry are generally secured by limited service hospitality
properties and are generally made to owner-operated facilities operating under
national franchises. We believe that franchise operations offer attractive
lending opportunities because such businesses generally employ proven business
concepts, have national reservation systems, have consistent product quality,
are screened and monitored by franchisors and generally have a higher rate of
success when compared to other independently operated businesses.

Advisory Services

In addition to our lending operations, we earn revenue through our
investment advisor subsidiary, PMC Advisers, Ltd. and its subsidiary (PMC
Advisers), which evaluates and services loans and other investment
alternatives pursuant to a fee arrangement with PMC Commercial Trust (PMC
Commercial). PMC Commercial, our affiliate, is a real estate investment
trust. The executive officers of PMC Capital are also the executive officers
of PMC Commercial. PMC Advisers provides these investment advisory services to
PMC Commercial pursuant to investment management agreements (the Investment
Management Agreements) entered into between PMC Capital, PMC Advisers and PMC
Commercial. As the investment advisor for PMC Commercial, PMC Advisers has
earned $2.2 million, $2.3 million and $2.6 million in advisory fees during the
years ended December 31, 2000, 1999 and 1998, respectively.

2



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PMC Commercial provides loans to persons or entities whose borrowing needs
and/or strength and stability exceed the limitations set by the SBA for our SBA
approved loan programs. As a result, we generally pursue different prospective
borrowers than PMC Commercial. In order to further mitigate the potential for
conflicts of interest, PMC Commercial, PMC Capital and PMC Advisers have
entered into a loan origination agreement (the Loan Origination Agreement).
Pursuant to the Loan Origination Agreement, loans that are greater than $1.1
million that meet PMC Commercials underwriting criteria are first presented to
PMC Commercial for funding. If PMC Commercial does not have available funds,
we may originate those lending opportunities as long as they meet our lending
criteria. The fee of PMC Advisers is primarily based on the value of PMC
Commercials assets. As a result, any increases in the dollar amount of PMC
Commercials assets will benefit PMC Advisers, and PMC Advisers will have a
potential conflict in determining whether to advise PMC Commercial to acquire
assets or write-down the value of any assets. In order to mitigate the risk to
PMC Commercial from increasing its asset base through leveraged transactions,
the Investment Management Agreements provide PMC Advisers with a reduced fee
for any loans originated with capital obtained through borrowings.

SBA 7(a) Lending Program

Under the SBA 7(a) program, we primarily originate variable-rate loans
that are partially guaranteed by the SBA. Our SBA 7(a) loans are primarily
provided to small businesses for the purpose of acquiring real estate. We also
lend money to business start-ups for purposes of leasehold improvements, for
purchasing machinery and equipment and other start-up expenditures. The loans
are collateralized by a mortgage or other liens on the assets of the borrower.
In all cases, the owners of the business must personally guarantee the
repayment of the loan.

Our SBA 7(a) loans will typically range in size from $100,000 to $1.4
million. Over 99% of our SBA 7(a) portfolio had variable interest rates as of
December 31, 2000. Pricing on our SBA 7(a) loans is generally a spread over
the prime rate ranging from 1.00% to 2.75%, which is adjusted on a quarterly
basis. These loans are fully amortizing and payable in equal monthly
installments of principal and interest, primarily due on the first day of the
month following the month in which the loan was fully funded.

The number and dollar volume of loans originated by First Western under
the SBA 7(a) program decreased during the year ended December 31, 2000. The
decrease in volume primarily related to an increase in competition from
alternative loan products. These other products often provide prospective
borrowers that we target with fixed interest rates at less than the floating
interest rates available through the SBA 7(a) program. We have also continued
to face increased competition to originate SBA 7(a) program loans from other
SBA 7(a) program lenders. Accordingly, as SBA 7(a) program funding decreased,
the premiums earned on the sales of the government guaranteed portions of these
loans were significantly reduced from prior years. In addition, due to the
high rate of prepayments experienced in our most concentrated industry, the
limited service hospitality industry, purchasers of the guaranteed portion of
our SBA 7(a) loans significantly decreased the premium paid for these types of
assets.

During 1999, we refocused our marketing efforts to emphasize loan
originations under the SBA 7(a) program. This resulted in an increase in
revenues generated from the sales of the guaranteed portion of the SBA 7(a)
program loans during the latter half of 1999 and the first quarter of 2000.
However, due to the intense competition noted above, this positive trend did
not continue.

3



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##### Table of Contents



During December 2000, Congress enacted legislation (effective for loans
originated after December 31, 2000) that should have a positive impact on SBA
7(a) lending. The provisions of the bill that impact us are as follows:



| |  |  | The maximum SBA guaranty increased from $750,000 to
$1,000,000. We have originated several SBA 7(a) loans that would
have benefited from this increase;                                                                                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A prepayment fee can now be charged on new loans that
have maturities equal to or greater than 15 years. This will
benefit us in several ways. First, we will receive the fees on
the unguaranteed portion of the loan. Second, the likelihood of
prepayment is reduced thereby potentially increasing the premium
that a purchaser might pay for the guaranteed portion of our
loans; and
|
| |  |  | The guaranty fees required to be paid by borrowers have
been slightly lowered.                                                                                                                                                                                                                                                                                                            

Commercial Mortgage Loans

We originate mortgage loans to small businesses primarily collateralized
by commercial real estate. We believe that we successfully compete in the
commercial real estate finance market due to our understanding of the
borrowers business and the flexible loan terms that we offer. We use an
intrinsic value approach to assess new commercial mortgage loans, which
requires an analysis of the replacement cost of the collateral and an analysis
of local market conditions. We also consider the underlying cash flow of the
real estate tenant or owner-occupant as well as more traditional real estate
loan underwriting criteria.

We generally price new fixed-rate commercial mortgage loans based on a
fixed spread ranging from 3.5% to 4.7% over the ten-year U.S. Treasury rate.
Since 1998, commercial lending competition has increased. The result was that
the spreads charged by commercial real estate lenders in the marketplace
narrowed. Accordingly, our net spreads over treasury rates were reduced in
order to match our competition. At December 31, 2000, 70.4% of our retained
portfolio of commercial mortgage loans carried a fixed interest rate, and 29.6%
carried a floating interest rate based on the prime rate. Our fixed interest
rate loans primarily require level payments of principal and interest
calculated to amortize the principal on a ten to 25-year basis. Sometimes the
loans with less than a 25-year maturity have a balloon payment at maturity.
Our variable interest rate loans require payments of principal and interest,
reset on a quarterly basis, to fully amortize the loan over its life (typically
ten to 20 years.)

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##### Table of Contents



The following table contains data for our loan portfolio, broken down by
division:

|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |   |      |  
|------------------ | --------------- | --------------------------------------- |  | ------------------------------------ | ----- | -------- |  | ---- | ------ | ------- |  | ---- | ---- | ---- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ---- | - |  | - | ---- | -
|                   |                 |                                         |  | Total                                |       | SBA 7(a) |  | SBIC |        | Non-SBA
|                   |                 |                                         |  |                                      |       |          |  |      |        |        
|                   |                 |                                         |  | 2000                                 |       | 1999     |  | 2000 |        | 1999    |  | 2000 |      | 1999 |  | 2000 |       | 1999
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |     
|                   |                 |                                         |  | (In millions, except interest rates)
|As of December 31:
|                  
|                  
|                  
|                  
|                   | Retained loans:
|                  
|                  
|                  
|                  
|                   |                 | Balance outstanding                     |  | $                                    | 100.4 |          |  | $    | 1,06.3 |         |  | $    | 16.3 |      |  | $    | 16.9  |      |  | $ | 60.4  |   |  | $ | 48.4  |   |  | $ | 23.7 |   |  | $ | 41.0 |  
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |  
|                   |                 | Weighted average
interest rate          |  |                                      | 10.4  | %        |  |      | 10.0   | %       |  |      | 11.1 | %    |  |      | 10.4  | %    |  |   | 10.2  | % |  |   | 10.4  | % |  |   | 10.3 | % |  |   | 9.5  | %
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |  
|                   |                 | Loans past due greater
than 60 days (1) |  | $                                    | 0.9   |          |  | $    | 0.8    |         |  | $    | 0.8  |      |  | $    | 0.3   |      |  | $ | 0.1   |   |  | $ | 0.5   |   |  | $ |     |   |  | $ |     |  
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |  
|                   |                 | Percent of portfolio                    |  |                                      | 0.9   | %        |  |      | 0.8    | %      
|                   |                 |                                         |  |                                      |       |          |  |     
|                   | Serviced loans:
|                  
|                  
|                  
|                  
|                   |                 | Balance outstanding                     |  | $                                    | 307.7 |          |  | $    | 305.6  |         |  | $    | 93.0 |      |  | $    | 104.7 |      |  | $ | 115.4 |   |  | $ | 109.3 |   |  | $ | 99.3 |   |  | $ | 91.6 |  
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |  
|                   |                 | Loans past due greater
than 60 days (1) |  | $                                    | 3.2   |          |  | $    | 1.3    |         |  | $    | 3.1  |      |  | $    | 0.8   |      |  | $ | 0.1   |   |  | $ | 0.5   |   |  | $ |     |   |  | $ |     |  
|                   |                 |                                         |  |                                      |       |          |  |      |        |         |  |      |      |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |      |   |  |  
|                   |                 | Percent of portfolio                    |  |                                      | 1.0   | %        |  |      | 0.4    | %      
|                   |                 |                                         |  |                                      |       |          |  |     

|                                |                   |  |               |      |          |  |      |      |         |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|------------------------------- | ----------------- |  | ------------- | ---- | -------- |  | ---- | ---- | ------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                |                   |  | Total         |      | SBA 7(a) |  | SBIC |      | Non-SBA
|                                |                   |  |               |      |          |  |      |      |        
|                                |                   |  | 2000          |      | 1999     |  | 2000 |      | 1999    |  | 2000 |      | 1999 |  | 2000 |      | 1999
|                                |                   |  |               |      |          |  |      |      |         |  |      |      |      |  |      |      |     
|                                |                   |  | (In millions)
|For the year ended December 31:
|                               
|                               
|                               
|                               
|                                | Loan originations |  | $             | 44.1 |          |  | $    | 84.3 |         |  | $    | 12.3 |      |  | $    | 27.6 |      |  | $ | 18.9 |  |  | $ | 23.1 |  |  | $ | 12.9 |  |  | $ | 33.6 | 
|                                |                   |  |               |      |          |  |      |      |         |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |     
|                                | Loan losses       |  | $             | 0.5  |          |  | $    | 0.2  |         |  | $    | 0.4  |      |  | $    | 0.1  |      |  | $ | 0.1  |  |  | $ | 0.1  |  |  | $ |     |  |  | $ |     | 
|                                |                   |  |               |      |          |  |      |      |         |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |     

(1) Loans past due greater than 60 days are comprised of those loans that
are contractually past due more than 60 days. The balance does not
include loans which are 60 days or less past their due date that
management has identified as a potential problem asset and which we have
reduced the carrying value of the loan receivable. At December 31, 2000,
the total problem assets and loans past due greater than 60 days were $3.0
million (3.0%) of our retained portfolio and $9.5 million (3.1%) of our
serviced portfolio. At December 31, 1999, the total problem assets and
loans past due greater than 60 days were $1.0 million (0.9%) of our
retained portfolio and $4.2 million (1.4%) of our serviced portfolio.
Included in current years problem assets of $3.0 million of our retained
portfolio are loans on which we have reduced the carrying value by
$659,000. In addition, of the $9.5 million of problem assets on our
serviced portfolio, $1.9 million of the balance relates to securitized
loans and we have reflected a $218,000 reduction to our retained interests
in transferred assets as part of our valuation.

5



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Non-Investment Company Act Subsidiaries

PMC Capital is either directly or indirectly the sole shareholder or
partner of several non-investment company subsidiaries. These are: PMC
Advisers; PMC Funding Corp. and its subsidiary (PMC Funding); and several
special purpose entities (the Limited Partnerships as defined below)
established to facilitate loan securitizations. We have also entered into a
joint venture (the 2000 Joint Venture) with PMC Commercial, in which we own a
limited partnership interest (approximately 33% at December 31, 2000).

Our consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. The accounts of PMC
Advisers and PMC Funding are accounted for by the equity method of accounting
in conformity with the requirements of Federal securities laws. Our interest in
the Limited Partnerships and the 2000 Joint Venture is accounted for as
retained interests in transferred assets.

For a description of the operations of PMC Advisers, see Advisory
Services. For a description of the operations of the Limited Partnerships and
the 2000 Joint Venture, see Securitization and Structured Financing Programs.
PMC Funding is a Florida corporation that holds certain equity assets on our
behalf. PMC Fundings operations consist of income generated from the
construction and sale of property and the operation of properties acquired in
liquidation.

Securitization and Structured Financing Programs

We have, from time to time, sold portions of our loan portfolio into
special purpose entities to generate cash proceeds. These proceeds have been
used to fund additional loans. These types of loan sales are commonly referred
to as securitizations or structured loan sales and are either sold to
purchasers (for a securitization) or notes payable are issued (for a structured
financing) in the asset backed securities market. Further, gains on these
sales generated by our securitizations represent a material portion of our
revenues in the period in which these transactions occur. The gains on
securitizations cause timing differences between our net income determined in
accordance with generally accepted accounting principles (GAAP) and our
investment company taxable income. See Managements Discussion and Analysis
of Financial Condition and Results of Operations  Dividends.

Any delay in the sale of our loans beyond a quarter-end or year-end would
delay the gain on sale in the given quarter or year and will adversely affect
reported earnings for such quarter or year in which the delay occurred. Since
we rely on securitizations or structured loan sales as a source of operating
capital to fund new loan originations, any adverse changes in our ability to
complete these types of transactions, including any negative impact on the
asset-backed securities market for the type of product we generate, could have
a detrimental effect on our ability to sell loans thereby reducing our ability
to originate loans.

Problems in the asset backed securities market could affect our ability to
complete a securitization on a timely basis or may cause us to sell the loans
on unfavorable terms. The unfavorable terms could consist of any of the
following:



| |  |  | increased interest rates,                                        
| | - |  | -----------------------------------------------------------------
|
| |  |  | more cash reserve requirements, or                               
|
| |  |  | a requirement that we hold larger subordinated portions of loans.

Each of the items described above would have a negative impact on our net
income. While market conditions have subsequently improved, during the latter
half of 1998 the liquidity of the asset-backed securities market was
significantly impacted by several factors. Several publications identified the
global financial crisis in overseas currencies coupled with the potential for a
recession in the United States as a cause for investors in the type of
asset-backed securities that we place to widen the spreads they require in
order to purchase asset-backed securities. During November 1998, we completed
a sale of loans under these less than ideal market conditions, and the interest
rate that we paid for the notes of the special purpose entity was negatively
impacted by those market conditions. As a result, we recognized less profit on
our loan sale in November 1998 than we attained in previous and subsequent
periods.

6



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##### Table of Contents



Our asset established in conjunction with a securitization, the retained
interests in transferred assets, is determined based on the present value of
estimated future excess cash flows that we anticipate will be received from the
sold loans. The estimated future excess cash flows are calculated based on
managements assumptions concerning, among other things, anticipated defaults
and loan losses, anticipated prepayment speeds and discount rates. The
retained interests in transferred assets (the Retained Interests) consists of
required over-collateralization (i.e. retaining a portion of the sold loans),
cash reserve requirements and an interest-only strip receivable (the IO
Receivable). We retain a portion of the default and prepayment risk
associated with the Retained Interests which can be affected by any of the
following:



| |  |  | Any losses or prepayments on our sold loans will have a
negative effect on our future cash flows.                                                                                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Actual defaults and prepayments may vary from our
assumptions, possibly to a material degree.                                                                                                                                                                                                                                       
| |  |  | Faster than anticipated prepayments of principal or
loan losses will decrease the fair value attributed to the IO
Receivable.                                                                                                                                                                                                       
| |  |  | Slower than anticipated prepayments of principal or
loan losses will increase the fair value attributed to the IO
Receivable.                                                                                                                                                                                                       
| |  |  | The effect on our yield due to principal prepayments on
the sold loans occurring at a rate that is faster (or slower)
than the rate anticipated in the period immediately following the
completion of the securitization will not be entirely offset by a
subsequent like reduction (or increase) in the rate of principal
payments.

The weighted average lives of the underlying securitized loans will also
be affected by the amount and timing of delinquencies, defaults and recoveries,
if any, on defaulted underlying securitized loans. In addition, we are
required to deposit substantial amounts of the cash flows generated by our
interests in our securitizations (restricted cash) into reserve funds that
are pledged to the security holders.

We regularly measure our default, prepayment and other assumptions against
the actual performance of securitized receivables and the guaranteed portion of
loans sold. If we were to determine, as a result of such regular review or
otherwise, that we underestimated (or overestimated) defaults and/or
prepayments, or that any other material assumptions were inaccurate, we would
adjust the carrying value of our Retained Interests by making a charge (credit)
to income and adjusting the carrying value of the retained interests in
transferred assets on our consolidated balance sheets.

During the year ended December 31, 2000 as a result of prepayment activity
and actual loan losses on our securitized loans being less than managements
expectations, we recorded an unrealized gain of $871,000. During 1999, as a
result of prepayment speeds exceeding our expectations, we recorded a net
realized and unrealized loss of $500,000. During 1998, the amount by which
prepayments exceeded our expectation was more than offset by better than
anticipated loss rates on the portfolios. As a result, during the year ended
December 31, 1998 we recorded a net unrealized gain of $120,000. The net
unrealized gain on our Retained Interests assets was $1,379,000 and $590,000 at
December 31, 2000 and 1999, respectively.

Although we believe that we have made reasonable assumptions as to the
estimated future cash flows of the various pools of loans that have been sold
in securitization transactions, actual rates of default or prepayments may
differ from those assumed and other assumptions may be required to be revised
based upon future events. In connection with our securitization transactions,
we are required to enter into agreements (the Credit Enhancement Agreements)
that govern the assets and the flow of funds in and out of the related limited
partnership or trust formed as part of the securitization or structured loan
sale. Generally, the Credit Enhancement Agreements contain specified limits on
the delinquency, default and loss rates on the receivables included in each
trust or limited partnership. If, at any measurement date, the delinquency,
default or loss rate with respect to any trust or limited partnership were to
exceed the specified limits, provisions of the Credit Enhancement Agreement
would automatically increase the level of credit enhancement requirements for
that trust or limited partnership. During the period in which the specified
delinquency, default or loss rate was exceeded, excess cash flow, if any, would
be used to fund the increased credit enhancement levels instead of being
distributed to us, which would reduce our cash flow. We have never had a
reduction of cash flow as a result of an increased credit enhancement
requirement associated with our securitizations or structured financings.

7



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##### Table of Contents



In connection with our structured loan sales, limited partnerships have
been formed as special purpose entities (SPEs) to hold the loans sold and
issue notes payable secured by the loans. The SPEs consist of:



| |  |  | PMC Capital Limited Partnership (the 1996 Partnership) and its related general partner and trust;                                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | PMC Capital, L.P. 1998-1 (the 1998 Partnership) and its related general partner;                                                                                                 
| |  |  | PMC Capital, L.P. 1999-1 (the 1999 Partnership, and together with
the 1996 Partnership and the 1998 Partnership, the Limited
Partnerships) and its related general partner; and
| |  |  | PMC Joint Venture, 2000, L.P. (the 2000 Joint Venture) and its
related general partner.                                                                                          

The terms of the notes payable issued by the SPEs provide that the owners
of these special purpose entities are not liable for any payments on the notes.
Accordingly, if the special purpose entities fail to pay the principal or
interest due on the notes, the sole recourse of the holders of the notes is
against the assets of the special purpose entities. We have no obligation to
pay the notes, nor do the holders of the notes have any recourse against our
assets. PMC Capital is either directly or indirectly the sole owner of the
Limited Partnerships and owns approximately 33% of the 2000 Joint Venture. PMC
Capital is the servicer for all loans held by the SPEs. Moodys Investors
Service, Inc. has rated all of the transactions detailed below. Data relating
to our completed securitizations (by entity and by year completed) is as
follows:

|                                            |                        |   |                       |         |      |              |         |      | 
|------------------------------------------- | ---------------------- | - | --------------------- | ------- | ---- | ------------ | ------- | ---- | 
|                                            |                        |   | First Western        
|                                            |                        |   |                      
|                                            |                        |   | 1994                  |         | 1997
|                                            |                        |   |                       |         |     
|                                            |                        |   | (Dollars in millions)
|Dollar amount of loans sold                 |                        | $ |                       | 26.4    |      | $            |         | 22.8
|                                           
|                                           
|                                           
|                                           
|Portfolio as of December 31, 2000           |                        | $ |                       | 3.2     |      | $            |         | 6.8 
|                                           
|                                           
|                                           
|                                           
|Weighted average interest rate (2):        
|                                           
|                                           
|                                           
|                                           
|                                            | - At time of sale      |   |                       | P+2.66% |      |              | P+2.48%
|                                           
|                                           
|                                           
|                                           
|                                            | - At December 31, 2000 |   |                       | P+2.66% |      |              | P+2.40%
|                                           
|                                           
|                                           
|                                           
|Cost of funds on the notes/certificates (2) |                        |   | P-1.25%               |         |      | P-1.90%     
|                                           
|                                           
|                                           
|                                           
|Subordinated interest retained (%)          |                        |   | 6.0%                  |         |      | 7.0%        
|                                           
|                                           
|                                           
|                                           
|Rating of certificates/notes                |                        |   | "Aaa"                 |         |      | "Aaa"/"A"(1)
|                                           
|                                           
|                                           
|                                           
|Cash reserve requirement (%)                |                        |   | 5.0%                  |         |      | 8.0%        



|(1) |  | The transaction had both the primary and subordinated portion of the
transaction rated and sold.             
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The variable rate interest rate and cost of funds is denoted by the
spread over (under) the prime rate (P).

|                                            |                        |   |                       |        |         |         |         |      |         |       |  |       |       |   |  |      | 
|------------------------------------------- | ---------------------- | - | --------------------- | ------ | ------- | ------- | ------- | ---- | ------- | ----- |  | ----- | ----- | - |  | ---- | 
|                                            |                        |   | PMC                  
|                                            |                        |   |                      
|                                            |                        |   | 1996(1)               |        | 1998(1) |         | 1999(1) |      | 2000(2)
|                                            |                        |   |                       |        |         |         |         |      |        
|                                            |                        |   | (Dollars in millions)
|Dollar amount of loans sold                 |                        | $ |                       | 45.7   |         | $       |         | 43.1 |         | $     |  | 60.3  |       | $ |  | 28.1
|                                           
|                                           
|                                           
|                                           
|Portfolio as of December 31, 2000           |                        | $ |                       | 12.0   |         | $       |         | 35.1 |         | $     |  | 55.3  |       | $ |  | 28.0
|                                           
|                                           
|                                           
|                                           
|Weighted average interest rate (3):        
|                                           
|                                           
|                                           
|                                           
|                                            | - At time of sale      |   |                       | 11.52% |         |         | P+1.26% |      |         | 9.59% |  |       | 9.54%
|                                           
|                                           
|                                           
|                                           
|                                            | - At December 31, 2000 |   |                       | 11.15% |         |         | P+1.20% |      |         | 9.64% |  |       | 9.52%
|                                           
|                                           
|                                           
|                                           
|Cost of funds on the notes/certificates (3) |                        |   | 6.72%                 |        |         | P-1.00% |         |      | 6.60%   |       |  | 7.28%
|                                           
|                                           
|                                           
|                                           
|Subordinated interest retained (%)          |                        |   | 12.0%                 |        |         | 10.5%   |         |      | 8.0%    |       |  | 11.0%
|                                           
|                                           
|                                           
|                                           
|Rating of certificates/notes                |                        |   | "Aa"                  |        |         | "Aaa"   |         |      | "Aaa"   |       |  | "Aaa"
|                                           
|                                           
|                                           
|                                           
|Cash reserve requirement (%)                |                        |   | 5.0%                  |        |         | 8.0%    |         |      | 6.0%    |       |  | 6.0% 



|(1) |  | These transactions included loans contributed and sold by PMC Capital,
Western Financial and PMCIC.          
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | This transaction included loans contributed and sold by PMC Capital on
December 18, 2000.                    
|   
|   
|   
|   
|(3) |  | The variable-rate interest rate and cost of funds is denoted by the spread
over (under) the prime rate (P).

8



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REGULATORY OVERVIEW

Business Development Company

In 1994, PMC Capital elected to become a business development company
(BDC) rather than a registered investment company under the 1940 Act. BDCs
must register their shares under the Securities Exchange Act of 1934, as
amended (the Exchange Act), and are subject to the Exchange Acts periodic
reporting requirements rather than the 1940 Acts reporting requirements.
Companies having securities registered under the Exchange Act, such as PMC
Capital, must file quarterly rather than semi-annual financial reports. BDCs
have greater operating flexibility relating to capital structure, portfolio
diversification, transactions with downstream affiliates, executive stock
options and the frequency which they may make distributions from capital gains,
that may be greater than that available to registered investment companies. A
BDC is a unique kind of investment company that focuses on investing in or
lending to small private companies and making managerial assistance available
to them. A BDC may use capital provided by public shareholders and from other
sources to invest in long-term, private investments in growing small
businesses. A BDC provides shareholders the ability to retain the liquidity of
a publicly traded stock, while sharing in the benefits, if any, of investing in
privately owned companies. As a BDC, we may not acquire any asset other than
Qualifying Assets unless, at the time we make the acquisition, our Qualifying
Assets represent at least 70% of the value of our total assets (the 70%
test). The principal categories of Qualifying Assets relevant to our business
are:



| | (1) |  | Securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company. An eligible portfolio company is defined to include any issuer that:
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | is organized and has its principal place of business in the United States,                                                                       
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
| | b. |  | is not an investment company other than an SBIC wholly owned by a BDC (our investments in PMCIC and
Western Financial are Qualifying Assets), and
| | c. |  | does not have any class of publicly traded securities with respect to which a broker may extend margin
credit;                                   

| | (2) |  | Securities received in exchange for or distributed with respect to securities described in (1) above or pursuant to the exercise of options, warrants, or rights relating to such securities; and
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) |  | Cash, cash items, government securities, or high
quality debt securities (within the meaning of the 1940 Act),
maturing in one year or less from the time of investment.                         

To include certain securities described above as Qualifying Assets for the
purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans to a portfolio
company. We will provide managerial assistance on a continuing basis to any
portfolio company that requests it, whether or not difficulties are perceived.
As a BDC, we are entitled to issue senior securities in the form of stock or
senior securities representing indebtedness, as long as each class of senior
security has an asset coverage of at least 200% immediately after each such
issuance. This limitation is not applicable to borrowings by our SBIC or SBLC
subsidiaries, and therefore any borrowings by these subsidiaries are not
included in this asset coverage test. See Risk Factors. We may not change
the nature of our business so as to cease to be, or withdraw our election as, a
BDC unless authorized by vote of a majority of the outstanding voting
securities, as defined in the 1940 Act. Since we made our BDC election, we
have not made any substantial change in the nature of our business.

Regulated Investment Company (RIC)

Our status as a RIC enables us to avoid the cost of Federal and state
taxation and, as a result, achieve pre-tax investment returns. We believe that
this tax advantage enables us to achieve strong equity returns without having
to aggressively leverage our balance sheet. In order to qualify as a RIC, we
must, among other things:



| | (1) |  | Derive at least 90% of our gross income from dividends,
interest, payments with respect to securities loans, gains from
the sale of stock or other securities or other income derived
with respect to its business of investing in such stock or
securities;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (2) |  | Diversify our holdings so that
| | --- |  | ------------------------------



| |     |                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i.  | at least 50% of the value
of our assets consists of cash, cash items,
government securities, securities of other RICs and
other securities if such other securities of any
one issuer do not represent more than 5% of our
assets and 10% of the outstanding voting securities
of the issuer, and
|
| | ii. | no more than 25% of the value of our assets are invested in securities of one issuer (other than U.S. government securities or securities of other RICs), or of two or more issuers that are controlled by the Company; and                                                                      



| | (3) |  | Distribute at least 90% of our investment company
taxable income each tax year to the shareholders. In addition,
if a RIC distributes in a timely manner (or treats as deemed
distributed) 98% of its capital gain net income for each
one-year period ending on October 31 and distributes 98% of its
ordinary income for each calendar year, it will not be subject to
the 4% nondeductible Federal excise tax on certain undistributed
income of RICs.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fundamental and Other Policies of PMC and its Subsidiaries

As part of being a BDC, we are required to establish a core set of
fundamental policies. PMC Capital and each of its investment company
subsidiaries have designated certain investment policies as fundamental
policies.

The following investment policies of PMC Capital and its investment
company subsidiaries are fundamental policies and may not be changed without
the approval of the lesser of (i) more than 50% of PMC Capitals outstanding
voting securities, or (ii) 67% or more of PMC Capitals voting securities
present at a meeting of security holders at which a quorum is present. Our
Board of Directors may change other investment policies of PMC Capital at any
time.



|1) |  | The Company will not purchase or sell commodities or commodity contracts.                                                                                                                                                                                                                                                                                                          
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | The Company will not engage in short sales, purchase securities on margin
or trade in contracts commonly called puts or calls or in combinations
thereof, except that it may acquire warrants, options or other rights to
subscribe to or sell securities in furtherance of its investment
objectives.                                                                             
|  
|3) |  | The Company will not underwrite securities of other issuers, except that
it may acquire portfolio securities under circumstances where, if sold,
the Company might be deemed an underwriter for purposes of the Securities
Act of 1933. The Company may purchase restricted securities as to which
there are substantial restrictions on resale under the Securities Act of
1933.
|  
|4) |  | The Company will not purchase any securities of a company if any of the
directors or officers of the Company owns more than 0.5% of such company
and such persons owning more than 0.5% together own 5% or more of the
shares of such company.                                                                                                                                     
|  
|5) |  | The Company may issue senior securities in the form of debentures,
reverse repurchase agreements and preferred stock and may borrow monies
from banks and other lenders, all on an unsecured basis. The 1940 Act
limits the Company to the issuance of one class of senior debt securities
and one class of senior equity securities (as such terms are defined in
the 1940 Act).  
|  
|6) |  | The Company will not invest more than 25% of its total assets in any one
industry except in the lodging industry which may constitute 100% of the
Companys portfolio. The Company will invest at least 25% of its total
assets in the lodging industry.                                                                                                                           
|  
|7) |  | The Company may invest in real estate development companies, may make
real estate acquisition loans and real estate improvement loans and may
further make other loans secured by real estate.                                                                                                                                                                                     

10



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|8) |  | The Company may make loans and purchase debt securities in furtherance of
its investment objectives. The Company will not make loans to its
officers, directors or other affiliated persons.                                                                                                                                                                                                                                                                                          
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9) |  | PMCIC will perform the functions and conduct the activities contemplated
under the SBIA, and will provide assistance solely to small business
concerns which will contribute to a well-balanced national economy by
facilitating ownership of such concerns by persons whose participation in
the free enterprise system is hampered because of social or economic
disadvantages. These fundamental policies of PMCIC may not be changed
without the prior written consent of the SBA.

Overview of SBA Regulations

The lending operations of First Western, PMCIC and Western Financial are
regulated by the SBA, which establishes, among other things, maximum interest
rates that borrowers may be charged (which currently for PMCIC and Western
Financial may not exceed the greater of 19% per annum or 11% above our cost of
funds from the SBA) and minimum and maximum maturities for our loans (which
generally range from four to 25 years). Borrowers must satisfy certain
criteria established by the SBA to qualify for loans originated by us under SBA
sponsored programs, including limitations on the net worth and net income of
potential borrowers or alternative criteria that focus upon the number of
employees of the borrower and its gross revenues. In addition, the SBA
generally limits the aggregate amount of guaranties that can be provided to any
single borrower and restricts the use to which the loan proceeds can be
employed by the borrower. As part of legislation approved by Congress in 1996,
several increased costs were put into effect for new SBA debentures. A flat 3%
draw-down fee replaced the 2% commitment fee and the SBA commenced charging a
1% annual fee on SBA debentures issued after 1996. As part of this
legislation, the availability of 3% subsidized debentures and the right of the
SBA to purchase preferred stock of an SSBIC were repealed. This legislative
change has no effect on previously issued debentures or preferred stock of
SSBICs including PMCIC.

SBIC Regulations

SBICs are intended to stimulate the flow of private equity capital to
eligible small businesses. Under present SBA regulations, eligible small
businesses include businesses that have a net worth not exceeding $18 million
and have average annual fully taxed net income not exceeding $6 million for the
most recent two fiscal years. In addition, an SBIC must devote 20% of its
investment activity to smaller concerns as defined by the SBA. A smaller
concern is one that has a net worth not exceeding $6 million and has average
annual fully taxed net income not exceeding $2 million for the most recent two
fiscal years. SBA regulations also provide alternative size standard criteria
to determine eligibility, which depend on the industry in which the business is
engaged and are based on such factors as the number of employees and gross
sales. According to SBA regulations, SBICs may make long-term loans to small
businesses, invest in the equity securities of such businesses, and provide
them with consulting and advisory services. Both Western Financial and PMCIC
provide long-term loans to qualifying small businesses. Western Financial and
PMCIC are periodically examined and audited by the SBA staff to determine its
compliance with SBIC regulations. Western Financial and PMCIC have the
opportunity to sell to the SBA up to an additional aggregate principal amount
of $20 million, based on PMCICs and Western Financials regulatory capital, of
subordinated debentures with a maturity of up to ten years. Western Financial
and PMCIC had outstanding $31.3 million of subordinated debentures and PMCIC
had $7.0 million of preferred stock investments from the SBA at December 31,
2000. Interest rates on the SBA debentures currently outstanding have a
weighted average interest rate of 7.6%. At December 31, 2000, we had an
outstanding commitment from the SBA to purchase up to $5.2 million in
additional SBIC debentures. We anticipate that we will seek this additional
financing during 2001.

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SBLC Regulations

First Western is licensed to operate as an SBLC and is periodically
examined and audited by the SBA staff for purposes of determining compliance
with SBA regulations, including its participation in the SBA Preferred Lenders
Program. See SBA 7(a) Lending Program.

The SBA guarantees 75% of qualified loans over $100,000 up to $750,000
($1,000,000 after December 31, 2000). While the eligibility requirements of
the SBA 7(a) program vary by the industry of the borrower and other factors,
the general eligibility requirements are that: (i) gross sales of the borrower
cannot exceed $5.0 million, (ii) liquid assets or real estate equity of the
borrower and affiliates cannot exceed specified limits, and (iii) the maximum
aggregate SBA loan guarantees to a borrower cannot exceed $750,000 ($1,000,000
after January 1, 2001). Maximum maturities for SBA 7(a) loans are 25 years for
real estate and 15 years for the purchase of machinery and equipment.

In order to operate as an SBLC, a licensee is required to maintain a
minimum net worth (as defined by SBA regulations) of $1,000,000.

RISK FACTORS

Risks Associated with Forward-Looking Statements Included in this Form
10-K

This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties identified in this Form 10-K.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
the assumptions underlying the forward-looking statements are reasonable, any
of the assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Form 10-K will
prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved.

Concentration of Investments

As stated above, we have a fundamental policy regarding investment in the
lodging industry. At December 31, 2000 and 1999, retained loans to businesses
in the lodging industry comprised 53% and 55% of our total assets,
respectively. In addition, significant portions of the underlying assets of
our retained interests in transferred assets are loans to the lodging industry.
The concentration percentages above do not include an allocation of our
retained interests in transferred assets. There can be no assurance that we
will continue to experience the positive results we have historically achieved
from lending to the lodging industry or that market conditions will enable us
to maintain or increase our level of loan concentration in this industry. Any
economic factors that negatively impact this industry could have a material
adverse effect on our business. Additionally, at December 31, 2000, loans to
businesses located in Texas, Georgia and Arizona comprised approximately 20%,
15% and 11% of our outstanding loan portfolio, respectively. A decline in
economic conditions in any of these states may adversely affect us.

Volatility in Valuation of our Retained Interests in Transferred Assets

The value of our Retained Interests is determined based on managements
assumptions concerning, among other things, anticipated defaults and loan
losses and anticipated prepayment speeds. The discount rates that we utilize
are determined for each of the assets comprising the Retained Interests based
upon the inherent risk associated with each asset. Actual defaults and
prepayments may vary from our assumptions, possibly to a material degree.
Management has performed a sensitivity analysis of our Retained Interests to
highlight the volatility that results when prepayments and losses are different
than managements original assumptions. To the extent that

12



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losses are 0.50% per annum and 1.00% per annum higher than estimated, the
value of the Retained Interests would be reduced by $2.2 million and $4.3
million, respectively. If our prepayment speeds were to be increased by 5% per
annum and 10% per annum, the value of the Retained Interests would be reduced
by $1.2 million and $2.0 million, respectively.

Fluctuations in Quarterly Results

Our quarterly operating results will fluctuate based on a number of
factors. These include, among others, the completion of a securitization in a
particular calendar quarter, the interest rates on the securities issued in
connection with our securitization transactions, the volume of our loans
originated, the timing of prepayment of loans, interest rate changes, changes
in and the timing of the recognition of realized and unrealized gains or losses
on investments including the guaranteed portion of SBA 7(a) loans and retained
interests in transferred assets, the degree to which we encounter competition
in our markets and general economic conditions. As a result of these factors,
results for any period should not be relied upon as being indicative of future
operating performance.

Impact of Inflation

In an inflationary environment, we can experience problems selling loans
in a securitization or structured loan sale at a reasonable cost of funds and
capital. A majority of loans in our presently outstanding portfolio have a
fixed interest rate. Additionally, we may use our short-term credit facility
that has a variable interest rate cost of funds and availability to $15 million
for the origination of fixed interest rate loans. We anticipate that our
working capital needs will call for the completion of a securitization or
structured finance transaction sometime during the latter part of the year
ending December 31, 2001. If either U.S. Treasury rates were to increase
sharply (over 2%) from present levels (approximately 5.0% for the 10-year U.S.
Treasury) or spreads for asset backed securities similar to the type issued by
us were to increase sharply (over 1%) from our estimate of present levels, we
may not be able to complete a loan sale because of the reduction between the
yield on our fixed interest rate loans and the interest needed to be paid to
the purchasers. As a result, to the extent we have borrowed funds on our
short-term credit facility to originate fixed interest rate loans, our cash
flow and net spread will be reduced if short-term interest rates were to rise
from present levels. At December 31, 2000 we did not have any balance borrowed
on our short-term credit facility. We anticipate utilization of the facility
commencing during the second quarter of 2001.

Leverage

We have borrowed funds and issued shares of preferred stock, and intend to
borrow additional funds through advances on our revolving credit facility and
through the issuance of notes payable or SBA debentures, if available. As a
result, we are leveraged. The SBA and private lenders have fixed dollar claims
on our assets superior to the claims of the holders of our common stock.
Leverage magnifies the effect that rising or falling interest rates have on our
earnings. Any increase in the interest rate earned by us on investments in
excess of the interest rate or dividend payable on the funds obtained from
either borrowings or the issuance of preferred stock would cause our net income
and earnings per share to increase more than it would without leverage, while
any decrease in the interest rate earned by us on investments would cause net
income and earnings per share to decline by a greater amount than it would
without leverage. Leverage is thus generally considered a speculative
investment technique. In order for us to repay indebtedness or meet our
obligations in respect of any outstanding preferred stock on a timely basis, we
may be required to dispose of assets at a time which we would not otherwise do
so and at prices which may be below the net book value of such assets.
Dispositions of assets may adversely impact our results of operations.

Interest Rate and Prepayment Risk

As a result of the general downward trend in interest rates from 1997
through February 1999, we experienced an increase in the number and the dollar
amount of prepaid loans. First Westerns loans (all variable interest rate)
did not have prepayment penalties for loans originated prior to January 2001 in
accordance with SBA policy. The SBA changed its policy on prepayment fees to
allow a 5% fee for loans prepaid in the first year, 3% in the second year and
1% in the third year. This change in SBA policy may lessen the amount of
prepayments received during the first three years after the origination of a
loan. On prepayments of fixed-rate loans, we received

13



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the immediate benefit of the prepayment charge; however, the proceeds from the
prepayments were invested initially in temporary investments and have been
re-loaned or committed to be re-loaned at lower rates. See Managements
Discussion and Analysis of Financial Condition and Results of Operations. The
impact of the lower lending rates was partially offset by the reduced cost of
our borrowings. Our net income is affected by the spread between the rate at
which we borrow funds and the rate at which we loan these funds. PMC Capital,
Western Financial and PMCIC have primarily originated fixed interest rate loans
and the borrowed funds of these companies are typically long-term and at fixed
interest rates. First Western originates variable interest rate loans and has
utilized both advances from PMC Capital and the securitization and sale of its
portfolio (transactions were completed in 1994 and 1997) to obtain funds
necessary to originate loans. If the yield on loans originated by us with
funds obtained from borrowings or the issuance of preferred stock fails to
cover the cost of such funds, our cash flow will be reduced. During periods of
changing interest rates, interest rate mismatches on our retained loans could
negatively impact our net income, dividend yield and the market price of our
common stock. Generally, the fixed-rate loans that we originate have
prepayment penalties. As interest rates decline, we may experience significant
prepayments. Such prepayments, as well as scheduled repayments, are likely to
be re-loaned or invested at lower rates. As a result, these factors may impair
our ability to maintain dividend distributions at existing levels.

Risks of Lending to Small Businesses

Our loan portfolio consists primarily of loans to small, privately owned
companies. There is no publicly available information about these companies,
and therefore we must rely on the due diligence of our employees to obtain
information in connection with our investment decisions. Our borrowers may not
meet net income, cash flow and other coverage tests typically imposed by bank
lenders. A borrowers ability to repay its loan may be adversely impacted by
numerous factors, including the downturn in its industry or negative economic
conditions. Deterioration in a borrowers financial condition and prospects
may be accompanied by deterioration in the collateral for the loan. In
addition, small businesses depend on the management talents and efforts of one
person or a small group of people for their success. The loss of services of
one or more of these persons could have a material adverse impact on the
operations of the small business. Small companies are typically more
vulnerable to customer preferences, market conditions and economic downturns
and often need substantial additional capital to expand or compete. Such
companies may also experience substantial changes in operating results and may
have highly leveraged capital structures. These factors may have an impact on
the ultimate recovery of our loans to such businesses. Loans to small
businesses, therefore, involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be considered
speculative.

Portfolio Valuation

There is typically no public market or established trading market for the
loans we originate. The illiquidity of most of our portfolio of loans may
adversely affect our ability to dispose of such loans and securities at times
when it may be advantageous for us to liquidate such investments. As a result,
the valuation of the loans in our portfolio is subject to the estimate of our
Board of Directors. Unlike traditional lenders, we do not establish general
reserves for anticipated loan losses, but we adjust quarterly the valuation of
our portfolio to reflect the estimate of our Board of Directors as to the
current realizable value of the loan portfolio including specific reserves on
problem loans. In the absence of a readily ascertainable market value, the
estimated value of our portfolio of loans may differ significantly from the
values that would be placed on the portfolio if a ready market for the loans
existed. Any changes in estimated values are recorded in our statement of
operations as Net unrealized gains (losses) on investments.

Loss of Pass-Through Tax Treatment

We qualify as a RIC under the Internal Revenue Code (the Code). If a
company meets certain diversification and distribution requirements under the
Code, it qualifies for pass-through tax treatment. We would cease to qualify
for pass-through tax treatment if we were unable to comply with these
requirements or if we ceased to qualify as a BDC under the 1940 Act. We are
also subject to a 4% excise tax (and, in certain cases, corporate level income
tax) if we fail to make certain distributions. Failure to qualify as a RIC
would subject us to Federal income tax as if we were an ordinary corporation,
resulting in a substantial reduction in both our net assets and the amount of
income available for distribution to our shareholders.

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Ongoing Need for Additional Capital Since Earnings are Required to be Paid
as Dividends

We will continue to need working capital to fund loans. Historically, we
have sold loans, borrowed from financial institutions and have issued equity
securities. A reduction in the availability of funds from financial
institutions, the equity market or the asset backed securities market could
have a material adverse effect on us. We must distribute at least 90% of our
net operating income to our shareholders to maintain our RIC status under the
Code. As a result, such earnings are not available to fund loan originations.
We expect to be able to borrow from financial institutions and sell loans in
the asset backed securities market. As a result of our current market price,
we do not anticipate selling additional equity securities during the year ended
December 31, 2001. If we fail to obtain funds from such sources or from other
sources to fund our loans, it could have a material adverse effect on our
financial condition and our results of operations. In addition, as a BDC, we
are generally required to maintain a ratio of at least 200% of total assets to
total borrowings, which restricts our ability to borrow in certain
circumstances.

Highly Regulated Environment

We are regulated by the Securities and Exchange Commission and the SBA. In
addition, changes in the laws or regulations that govern BDCs, RICs, SBICs and
SBLCs may significantly affect our business. Laws and regulations may be
changed from time to time, and the interpretations of the relevant laws and
regulations also are subject to change. Any change in the law or regulations
that govern our business could have a material impact on us or our operations.

Economy and Competition

Our primary competition has come from banks, financial institutions and
other lending companies. Some of these competitors have greater financial and
larger managerial resources than us and are able to provide services we are not
able to provide (i.e.depository services). Competition increased as the
financial strength of the banking and thrift industries improved and interest
rates remained high. In our opinion, during this period there was competitive
lending activity at advance rates and interest rates that were considerably
more aggressive than those offered by us. In order to maintain a quality
portfolio, we continued to adhere to our historical underwriting criteria, and
as a result, certain loan origination opportunities were not funded by us. We
believe we compete effectively with such entities on the basis of the variety
of our lending programs offered, the interest rates, our long-term maturities
and payment schedules, the quality of our service, our reputation as a lender,
the timely credit analysis and decision-making processes, and the renewal
options available to borrowers.

EMPLOYEES

At December 31, 2000, we employed 54 individuals including marketing
professionals, investment professionals, operations professionals and
administrative staff. Our loan processing is centralized in our Dallas, Texas
office. In addition, we have loan production offices in Atlanta, Georgia,
Kansas City, Missouri and Phoenix, Arizona. Our management believes the
relationship with our employees is good.

15



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##### Table of Contents



QUARTERLY RESULTS

The following table shows the earnings per share on a quarterly basis for the
last ten years.

|         |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|-------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|Qtr      |  | 2000 |      | 1999 |  | 1998 |      | 1997 |  | 1996 |      | 1995 |  | 1994 |      | 1993 |  | 1992 |      | 1991
|         |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |     
|First    |  | $    | 0.22 |      |  | $    | 0.23 |      |  | $    | 0.28 |      |  | $    | 0.29 |      |  | $    | 0.27 |      |  | $ | 0.23 |  |  | $ | 0.19 |  |  | $ | 0.18 |  |  | $ | 0.18 |  |  | $ | 0.15 | 
|        
|        
|        
|        
|Second * |  |      | 0.22 |      |  |      | 0.42 |      |  |      | 0.28 |      |  |      | 0.31 |      |  |      | 0.30 |      |  |   | 0.25 |  |  |   | 0.23 |  |  |   | 0.23 |  |  |   | 0.23 |  |  |   | 0.15 | 
|        
|        
|        
|        
|Third    |  |      | 0.20 |      |  |      | 0.24 |      |  |      | 0.29 |      |  |      | 0.30 |      |  |      | 0.30 |      |  |   | 0.27 |  |  |   | 0.26 |  |  |   | 0.25 |  |  |   | 0.19 |  |  |   | 0.18 | 
|        
|        
|        
|        
|Fourth * |  |      | 0.29 |      |  |      | 0.22 |      |  |      | 0.31 |      |  |      | 0.45 |      |  |      | 0.31 |      |  |   | 0.28 |  |  |   | 0.44 |  |  |   | 0.21 |  |  |   | 0.19 |  |  |   | 0.16 | 
|         |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|         |  | $    | 0.93 |      |  | $    | 1.11 |      |  | $    | 1.16 |      |  | $    | 1.35 |      |  | $    | 1.18 |      |  | $ | 1.03 |  |  | $ | 1.12 |  |  | $ | 0.87 |  |  | $ | 0.79 |  |  | $ | 0.64 | 
|         |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 

* Includes $0.05 in the fourth quarter of 2000, $0.22 in the second quarter of
1999, $0.08 in the fourth quarter of 1998, $0.21 in the fourth quarter of 1997
and $0.24 in the fourth quarter of 1994 relating to securitizations of portions
of our loan portfolio.




Item 2. PROPERTIES

Our headquarters are located at 18111 Preston Road, Suite 600, Dallas,
Texas 75252. We lease approximately 13,000 square feet in an office building
pursuant to a five year lease which commenced in December 1998. In addition,
at December 31, 2000, we also leased office space in Kansas City, Missouri,
Phoenix, Arizona and Atlanta, Georgia. The aggregate annual lease payments for
the year ended December 31, 2000 were approximately $300,000.




Item 3. LEGAL PROCEEDINGS

We are a party to certain lawsuits in the normal course of our business.
While the outcome of these legal proceedings cannot at this time be predicted
with complete certainty, we do not expect that any of these actions either
individually or in the aggregate will have a material effect upon our financial
condition or results of operations.




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the last
quarter of the year ended December 31, 2000.

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##### Table of Contents






PART II




Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Common Stock is traded on the American Stock Exchange (AMEX) under
the symbol PMC. The following table sets forth, for the periods indicated,
the high and low sales prices as reported on the AMEX and the dividends per
share declared by us for each such period.

|                   |  |      |        |     |  |       |        |       |  |           |        |           |  |  |        | 
|------------------ |  | ---- | ------ | --- |  | ----- | ------ | ----- |  | --------- | ------ | --------- |  |  | ------ | 
|                   |  |      |        |     |  |       |        |       |  | Regular   |        | Special  
|                   |  |      |        |     |  |       |        |       |  | Dividends |        | Dividends
|                   |  |      |        |     |  |       |        |       |  | Per       |        | Per      
|Quarter Ended      |  | High |        | Low |  | Share |        | Share
|                   |  |      |        |     |  |       |        |      
|December 31, 2000  |  |      | $9.81  |     |  |       | $7.75  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|September 30, 2000 |  |      | $10.38 |     |  |       | $9.13  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|June 30, 2000      |  |      | $10.13 |     |  |       | $7.75  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|March 31, 2000     |  |      | $8.31  |     |  |       | $7.75  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|                  
|December 31, 1999  |  |      | $8.75  |     |  |       | $7.88  |       |  |           | $0.250 |           |  |  | $0.015 | 
|                  
|                  
|                  
|                  
|September 30, 1999 |  |      | $9.00  |     |  |       | $8.06  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|June 30, 1999      |  |      | $8.75  |     |  |       | $7.75  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|March 31, 1999     |  |      | $10.13 |     |  |       | $8.31  |       |  |           | $0.250 |           |  |  |       | 
|                  
|December 31, 1998  |  |      | $11.00 |     |  |       | $8.00  |       |  |           | $0.250 |           |  |  |       | 
|                  
|                  
|                  
|                  
|September 30, 1998 |  |      | $13.75 |     |  |       | $9.00  |       |  |           | $0.325 |           |  |  |       | 
|                  
|                  
|                  
|                  
|June 30, 1998      |  |      | $14.38 |     |  |       | $13.56 |       |  |           | $0.325 |           |  |  |       | 
|                  
|                  
|                  
|                  
|March 31, 1998     |  |      | $15.00 |     |  |       | $13.75 |       |  |           | $0.325 |           |  |  |       | 

On March 15, 2001, there were approximately 920 shareholders of record of
Common Stock and the last reported sales price of the Common Stock was $8.99
per share.

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##### Table of Contents






Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following is a summary of our Selected Consolidated Financial Data as
of and for the five years in the period ended December 31, 2000. The following
data should be read in conjunction with our consolidated financial statements
and the notes thereto and Managements Discussion and Analysis of the
Financial Condition and Results of Operations appearing elsewhere in this Form
10-K. The selected consolidated financial data presented below has been
derived from our consolidated financial statements.

|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |          |  
|----------------- | --------------------------------------------------------------------------- |  | -------------------------------------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | - |  |  | -------- | -
|                  |                                                                             |  | Years Ended December 31,                    
|                  |                                                                             |  |                                             
|                  |                                                                             |  | 2000                                         |          | 1999 |  | 1998 |          | 1997 |  | 1996
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |     
|                  |                                                                             |  | (In thousands, except per share information)
|Operating:       
|                 
|                 
|                 
|                 
|                  | Operating income                                                            |  |                                              | $21,584  |      |  |      | $22,627  |      |  |      | $24,314  |   |  |  | $24,406  |   |  |  | $23,821  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Operating expenses                                                          |  |                                              | ($11,280 | )    |  |      | ($11,140 | )    |  |      | ($11,091 | ) |  |  | ($10,602 | ) |  |  | ($10,454 | )
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Realized and unrealized gain (loss)
on investments                          |  |                                              | $949     |      |  |      | $1,933   |      |  |      | $726     |   |  |  | $1,818   |   |  |  | ($147    | )
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Net operating income and realized
and unrealized gain (loss) on
investments |  |                                              | $11,253  |      |  |      | $13,420  |      |  |      | $13,949  |   |  |  | $15,622  |   |  |  | $13,220  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Dividends declared, common                                                  |  |                                              | $11,846  |      |  |      | $12,007  |      |  |      | $14,473  |   |  |  | $14,543  |   |  |  | $12,853  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Basic and diluted earnings per
common share                                 |  |                                              | $0.93    |      |  |      | $1.11    |      |  |      | $1.16    |   |  |  | $1.35    |   |  |  | $1.18    |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Dividends per common share                                                  |  |                                              | $1.00    |      |  |      | $1.02    |      |  |      | $1.23    |   |  |  | $1.27    |   |  |  | $1.16    |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Weighted average common shares
outstanding                                  |  |                                              | 11,841   |      |  |      | 11,829   |      |  |      | 11,800   |   |  |  | 11,411   |   |  |  | 11,002   |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Loans funded                                                                |  |                                              | $44,158  |      |  |      | $84,264  |      |  |      | $66,450  |   |  |  | $86,361  |   |  |  | $70,154  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|At end of period:
|                 
|                 
|                 
|                 
|                  | Loans receivable, net                                                       |  |                                              | $100,353 |      |  |      | $106,325 |      |  |      | $116,711 |   |  |  | $127,240 |   |  |  | $93,354  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Total assets                                                                |  |                                              | $161,478 |      |  |      | $165,191 |      |  |      | $163,349 |   |  |  | $165,839 |   |  |  | $163,431 |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Notes and debentures payable                                                |  |                                              | $72,977  |      |  |      | $73,973  |      |  |      | $74,790  |   |  |  | $76,290  |   |  |  | $79,570  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Preferred stock of consolidated
subsidiary                                  |  |                                              | $7,000   |      |  |      | $7,000   |      |  |      | $7,000   |   |  |  | $7,000   |   |  |  | $7,000   |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Common shareholders equity                                                 |  |                                              | $72,667  |      |  |      | $73,314  |      |  |      | $72,151  |   |  |  | $70,166  |   |  |  | $62,903  |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Number of common shares
outstanding                                         |  |                                              | 11,854   |      |  |      | 11,829   |      |  |      | 11,829   |   |  |  | 11,631   |   |  |  | 11,162   |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|Ratios:          
|                 
|                 
|                 
|                 
|                  | Return on average assets (1)                                                |  |                                              | 6.9%     |      |  |      | 8.2%     |      |  |      | 8.5%     |   |  |  | 9.7%     |   |  |  | 8.3%     |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         
|                  | Return on common shareholders
equity (2)                                   |  |                                              | 15.1%    |      |  |      | 18.1%    |      |  |      | 19.2%    |   |  |  | 23.3%    |   |  |  | 21.3%    |  
|                  |                                                                             |  |                                              |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |  |         



---

|(1) |  | Based on the average value of assets which is our total assets on the first day of the year and on the last day of each quarter of the
year, divided by five.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Based on the total shareholders equity on the first day of the year
and on the last day of each quarter of the year, divided by five.                       

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##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations

General

Our operations include originating, servicing and selling commercial
loans. We sell the government guaranteed portion of our loans originated under
the SBA 7(a) program and sell commercial mortgage loans through securitizations
and structured financings. Historically, we have retained servicing rights and
residual interests in all loans sold. Servicing rights include the right to
collect payments on behalf of the loan purchaser, monitor the loan for any
defaults and address any problems in collecting the required principal and
interest payments. We retain a residual interest in sold loans by owning a
percentage of the related loan and by establishing cash reserves to cover
future losses relating to the sold loans through our ownership in our Special
Purpose Entities (the SPEs). In addition, we operate as an investment
manager to evaluate properties and loans and to service loans and lease
contracts pursuant to fee arrangements with PMC Commercial. Our revenue
sources include the following:



| |  |  | Interest earned on commercial loans originated and retained
including the effect of commitment fees collected at the inception of
the loan.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Earnings on the retained interests in transferred assets.                                                                                  
|
| |  |  | Fee income from the management of PMC Commercials property and loan portfolios.                                                           
|
| |  |  | Equity interests in the income of our non-investment company unconsolidated subsidiaries.                                                  
|
| |  |  | Premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) program loans    into the secondary market.             
|
| |  |  | Interest earned on temporary (short-term) investments.                                                                                     
|
| |  |  | Gains relating to securitizations.                                                                                                         
|
| |  |  | Other fees, including: late fees, prepayment fees, construction monitoring and site visit fees.                                            

Interest income includes the stated interest rate earned on a loan and the
collection of loan origination fees. Our ability to generate interest income
is dependent on economic, regulatory and competitive factors that influence
interest rates and loan originations, and our ability to secure financing for
our investment activities. For a more detailed description of the risk factors
affecting our financial condition and results of operations, see Risk Factors
in Item 1 of this Form 10-K.

Our retained loan portfolio at value was $100.4 million and $106.3 million
at December 31, 2000 and 1999, respectively. During the years ended December
31, 2000 and 1999, we originated investments in loans totaling $44.2 million
and $84.3 million and received repayments and sold loans totaling $48.9 million
and $90.2 million, respectively. Primarily as a result of the structured loan
sale in December 2000, our total loan portfolio decreased by 6% from December
31, 1999 to December 31, 2000. Our serviced loan portfolio increased by $2.1
million (1%) to $307.7 million at December 31, 2000 from $305.6 million at
December 31, 1999.

As a result of several factors, the number and dollar volume of loans
originated under the SBA 7(a) program decreased. The primary factors that
contributed to this decrease were an increase in competition from alternative
loan products and an increase in competition to originate SBA 7(a) program
loans from other SBA 7(a) program lenders. These other products often provide
prospective borrowers with fixed interest rates at less than the floating
interest rates available through the SBA 7(a) program. In addition, due to the
high rate of prepayments experienced in the limited service hospitality
industry, purchasers of the guaranteed portion of our SBA 7(a) loans have
significantly decreased the premium paid for these assets. Accordingly, SBA
7(a) program funding had decreased and the premiums earned on the sales of the
government guaranteed portions of these loans were significantly reduced from
prior to 1998. We refocused our marketing effort to emphasize loan
originations under the SBA 7(a) program, and the result was an increase in
revenues generated from the sales of the guaranteed portion of the SBA 7(a)
program loans during the latter half of 1999 and the first quarter of 2000.
However, due to the intense competition and other available loan products, this
positive trend did not continue. During the year ended December 31, 2000,
funding of SBA 7(a) program loans were $12.3 million, a decrease of 55% from
the $27.6

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million funded during the year ended December 31, 1999. For the years ended
December 31, 2000, 1999 and 1998, revenues generated by government guaranteed
loan sales were $573,000, $1,090,000 and $776,000, respectively.

As a result of the low interest rate environment during 1998 and the
beginning of 1999, we experienced an increased rate in the prepayment of our
retained loans. During the years ended December 31, 2000, 1999 and 1998, we
received $11.2 million, $15.4 million and $24.7 million, respectively, in
collections of principal on retained loans including prepayments. For the
years ended December 31, 2000, 1999 and 1998, principal collections (including
prepayments), as an annualized percentage of our total retained loan portfolio,
were 11%, 15% and 19%, respectively. Prepayments generally increase during
times of declining interest rates. When fixed interest rate loans are paid-off
prior to their maturity, we receive the immediate benefit of prepayment
charges. Prepayment charges result in one-time increases in our other
investment income. The proceeds from the prepayments we have received were
invested initially in temporary investments and have generally been re-loaned
or committed to be re-loaned at lower interest rates than the prepaid loans.
These lower interest rates have had an adverse effect on our results of
operations and depending upon the rate of future prepayments may further impact
our results of operations. The impact of the lower lending rates was partially
offset by reduced cost of borrowings. First Westerns loans (all
variable-rate) did not have any prepayment fees in accordance with SBA policy
prior to January 1, 2001. We believe that as a result of the current interest
rate environment (the prime rate was decreased by 1.5% during the first quarter
of 2001), we may see prepayment activity at levels greater than the levels of
prepayment activity experienced during 2000. However, since we do not expect
the competition to be as strong during this period of reduced interest rates,
we do not expect that the prepayment activity will be as high as it was during
1998.

Substantially all of the First Western loans are variable-rate which reset
quarterly based on a spread above the prime rate of interest as stated in The
Wall Street Journalon the first day of the applicable period (the Prime
Rate). The spread over the Prime Rate charged by First Western ranges from
0.5% to 2.75%.

The Prime Rates for variable-rate loans are as follows:

|               |  |  |      |   |  |      |      |   |      |  |      |  
|-------------- |  |  | ---- | - |  | ---- | ---- | - | ---- |  | ---- | -
|               |  |  | 2000 |   |  | 1999 |      |   | 1998
|               |  |  |      |   |  |      |      |   |     
|First Quarter  |  |  | 8.50 | % |  |      | 7.75 | % |      |  | 8.50 | %
|              
|              
|              
|              
|Second Quarter |  |  | 9.00 | % |  |      | 7.75 | % |      |  | 8.50 | %
|              
|              
|              
|              
|Third Quarter  |  |  | 9.50 | % |  |      | 8.00 | % |      |  | 8.50 | %
|              
|              
|              
|              
|Fourth Quarter |  |  | 9.50 | % |  |      | 8.25 | % |      |  | 8.25 | %

The Prime Rate used for the first quarter of 2001 was 9.5%. The Prime
Rate was decreased during the first quarter of 2001 from 9.5% to 8.0%. This
reduction to the Prime Rate will reduce the rate we charge on variable rate
loans by 1.5% effective April 1, 2001. At December 31, 2000, approximately
$29.7 million of our retained loan portfolio had a variable interest rate,
therefore, assuming there are no other changes to the Prime Rate, this 1.5%
drop in interest rates will reduce our interest income by approximately
$450,000 on an annual basis.

The reduction in interest rates will also reduce our LIBOR based interest
expense on $15 million of variable interest rate debt by approximately $180,000
assuming there are no other changes to the LIBOR.

We receive other investment income from various sources including
prepayment fees, late fees, construction monitoring fees and site visit fees.
The amount of other investment income earned will vary based on volume of loans
funded, the timing and amount of financings, volume of loans which prepay, the
mix of loans (construction versus non-construction), the rate and type of loans
originated (whether fixed or variable) as well as the general level of interest
rates.

Expenses primarily consist of interest expense, salaries and related
benefits and overhead. General and administrative expenditures consist
primarily of insurance, advertising and promotional expense, telephone
services, corporate printing costs, and general office expenses. In addition,
we have other administrative costs which consist of profit sharing plan, rent,
legal and accounting, SBA fees and directors and shareholders expense. Our
operations are centralized in Dallas, Texas where our headquarters are located.
We presently have additional business development offices located in Kansas
City, Missouri, Atlanta, Georgia and Phoenix, Arizona.

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Recent Transactions and Activity:

Securitization of loans during 2000.On December 18, 2000, the 2000 Joint
Venture completed a structured sale of a pool of fixed-rate loans through a
private placement (the 2000 Private Placement). Both PMC Capital and PMC
Commercial contributed loans to the 2000 Joint Venture. The 2000 Joint Venture
issued approximately $74.5 million of its 2000 Loan-Backed Fixed Rate Notes
(the 2000 Notes) of which approximately $24.9 million (the 2000 PMC Notes)
was allocated to PMC Capital based on its ownership percentage in the 2000
Joint Venture. The 2000 PMC Notes were issued at par and have a stated
maturity of July 2024. The 2000 PMC Notes were issued with an interest rate of
7.28% and were originally collateralized by approximately $28.1 million of
loans sold by PMC Capital to the 2000 Joint Venture. The 2000 Notes were rated
Aaa by Moodys Investors Service. We have accounted for this transaction as
a sale and recorded a gain of $564,000 during the year ended December 31, 2000.

The net proceeds from the issuance of the 2000 PMC Notes (approximately
$24.9 million prior to payment of issuance costs of approximately $0.3 million
and the funding of approximately $0.8 million for a reserve fund held by the
trustee as collateral) were distributed to PMC Capital. At inception of the
2000 Joint Venture, PMC Capital owned a 33.5% limited partnership interest in
the 2000 Joint Venture. Our ownership of the 2000 Joint Venture will be
reduced based on the principal payments received on the underlying loans
contributed by PMC Capital to the 2000 Joint Venture. Our share of the profits
from the 2000 Joint Venture will be based upon the cash flow received from the
underlying loans contributed by PMC Capital to the 2000 Joint Venture. PMC
Capital is the servicer for all loans held by the 2000 Joint Venture.

The terms of the 2000 Notes provide that the partners of the 2000 Joint
Venture are not liable for any payments on the 2000 Notes. Accordingly, if the
2000 Joint Venture fails to pay the 2000 Notes, the sole recourse of the
holders of the 2000 Notes is against the assets of the 2000 Joint Venture.
Accordingly, we have no obligation to pay the 2000 Notes, nor do the holders of
the 2000 Notes have any recourse against our assets. PMC Capital and PMC
Commercial have entered into an indemnification agreement regarding the
performance of their respective loans sold to the 2000 Joint Venture. To the
extent that poor performance by one of the companys sold loans (the
Underperforming Company) is pervasive enough to cause the other company (the
Performing Company) to not receive cash flow that it otherwise would have
received, then the Underperforming Company must make the Performing Company
whole. If the cash flow reduction is considered to be temporary, then interest
will be paid as compensation to the Performing Company. If the reduction of
cash flows is deemed permanent, the balance of reduction to cash flows must be
paid to the Performing Company by the Underperforming Company. Based on our
present cash flow assumptions, including stress test analysis of increasing the
anticipated losses on each of the loan pools, it does not appear that the loans
sold by PMC Capital will cause any permanent cash flow reductions to PMC
Commercial nor will the loans sold by PMC Commercial cause any permanent cash
flow reductions to PMC Capital.

Securitization of loans during 1999.On June 3, 1999, the 1999
Partnership, completed a structured sale of a pool of fixed-rate loans through
a private placement (the 1999 Private Placement) of approximately $55.6
million of its 1999 Loan-Backed Fixed Rate Notes (the 1999 Notes). The 1999
Notes were issued at par and have a stated maturity of July 2024. The 1999
Notes were issued with an interest rate of 6.60% and were originally
collateralized by approximately $60 million of loans sold by PMC Capital to the
1999 Partnership. The 1999 Notes were rated Aaa by Moodys Investors
Service. The terms of the 1999 Notes provide that the partners of the 1999
Partnership are not liable for any payments on the 1999 Notes. Accordingly, if
the 1999 Partnership fails to pay the 1999 Notes, the sole recourse of the
holders of the 1999 Notes is against the assets of the 1999 Partnership.
Accordingly, we have no obligation to pay the 1999 Notes, nor do the holders of
the 1999 Notes have any recourse against our assets. The net proceeds from the
issuance of the 1999 Notes (approximately $55.6 million prior to payment of
issuance costs of approximately $0.5 million and the funding of approximately
$1.8 million for a reserve fund held by the trustee as collateral) were
distributed to PMC Capital. PMC Capital owns a 99.9% limited partnership
interest in the 1999 Partnership. PMC Capital is the servicer for all loans
held by the 1999 Partnership. We have accounted for this transaction as a sale
and recorded a gain of $2,564,000 during the year ended December 31, 1999.

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Certain Accounting Considerations

Historically, we have transferred assets to SPEs in connection with
securitizations and structured financings in order to obtain working capital to
originate new loans. The transfer of assets that qualifies for sale treatment
under SFAS No. 125 (Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities) is generally accounted for by the seller
by: (i) derecognizing all assets sold, (ii) recognizing all assets obtained
and liabilities incurred at their relative fair value, and (iii) recognizing
all assets retained at their allocated previous carrying amount based on
relative fair values. We typically receive cash and retain the right to
receive contractual servicing fees and the right to receive future interest
income on loans transferred that exceed the contractually specified servicing
fee, typically on the guaranteed portion of an SBA 7(a) program loan, in
exchange for a portion of the loan. The difference between (i) the carrying
value of the portion of loans sold and (ii) the sum of (a) cash received, (b)
servicing rights, and (c) the IO Receivable retained, constitutes the gain on
sale.

As of the date a securitization is completed, the value of the Retained
Interests are established based upon the initial estimate of the anticipated
discounted future cash flows retained by us. The assets that comprise our
Retained Interests are the restricted cash, an investment in the subordinated
portion of the sold receivables and the IO Receivable. Managements
assumptions include estimates of prepayment speeds, default rates, future loan
losses and discount rates. The discount rate is managements estimate of a
market rate based on interest rate levels at the time of completion of the
transaction considering the risks inherent in the transaction. There can be no
assurance of the accuracy of these estimates. If the prepayment speeds occur
at a faster rate than anticipated or future loan losses occur quicker than
expected or in amounts greater than expected, the value of the Retained
Interests will decline. If prepayments occur slower than anticipated or future
loan losses are less than expected, cash flows would exceed estimated amounts
and total income in future periods would be enhanced.

On a quarterly basis, we measure the fair value of and record income
relating to the Retained Interests based upon the future anticipated cash flows
discounted to reflect the current market interest rates for investments of this
type. Any appreciation (depreciation) of the Retained Interests is included in
the accompanying consolidated statements of income as either investments
written-off or as an unrealized gain (loss) on investments.

Recently Issued Accounting Pronouncements

In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No.
125. SFAS No 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of SFAS No. 125s provisions without
reconsideration. The accounting provisions of SFAS No. 140 should be applied
prospectively to transfers of financial assets occurring after March 31, 2001
while the disclosure requirements are required for financial statements with
fiscal years ending after December 15, 2000. We do not anticipate that the
impact of SFAS No. 140 will have a material effect on our consolidated
financial statements.

In July 2000, EITF 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interest in Securitized Financial Assets
(EITF 99-20) was issued. EITF 99-20 provides guidance on interest income
recognition and measurement guidance for interests retained in a securitization
transaction accounted for as a sale and for purchased beneficial interests.
EITF 99-20 is effective for all fiscal quarters beginning after December 15,
2000. The adoption of EITF 99-20 will not significantly impact our
consolidated financial statements.

In September 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In September 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 133 was originally effective for all fiscal
quarters of fiscal years beginning after September 15, 1999. SFAS No. 137
deferred the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning

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after June 15, 2000. SFAS No. 133 has no impact upon us as we had no
derivative financial instruments as of December 31, 2000.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) which provides guidance on revenue
recognition. Management has considered the provisions of SAB 101 and does not
believe SAB 101 has any impact on our consolidated financial statements.

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

Net operating income and realized and unrealized gain (loss) on
investments (hereinafter called net income) decreased by $2,167,000 (16%),
from $13,420,000 during the year ended December 31, 1999 to $11,253,000 during
the year ended December 31, 2000. As more fully detailed below, the most
significant reason for this decrease in net income was the reduction in the
amount of gain recognized on our securitization transactions of $2,000,000.
During the year ended December 31, 2000 we recognized $564,000 relating to the
securitization and sale of $28.1 million of loans during December 2000 compared
to a gain of $2,564,000 recognized from the securitization and sale of $60.3
million of loans portfolio during June 1999.

Interest income:Interest income decreased by $655,000 (5%), from
$14,195,000 for the year ended December 31, 1999 to $13,540,000 for the year
ended December 31, 2000. Interest income includes the interest earned on
loans, the interest earned on short-term (temporary) investments and the
up-front fees collected. This overall decrease was primarily attributable to a
decrease in income from up-front fees recognized. The decline in up-front fees
is directly related to the reduced loan origination volume when comparing the
year ended December 31, 2000 to the year ended December 31, 1999.

Interest income and commitment fees received on loans increased by
$138,000 (1%), from $12,922,000 during the year ended December 31, 1999 to
$13,060,000 during the year ended December 31, 2000. Interest income and
commitment fees received on loans was comparable during the year ended December
31, 2000 and 1999, however, the components changed as described below.
Interest income increased by approximately $1,391,000 (12%), from $11,237,000
during the year ended December 31, 1999 to $12,628,000 during the year ended
December 31, 2000 as a result of (i) an increase in the weighted average
retained loan portfolio outstanding of $14.7 million (14%) to $117.8 million
during the year ended December 31, 2000 from $103.1 million during the year
ended December 31, 1999 and (ii) an increase in the weighted average interest
rate primarily related to an increase in the Prime Rate causing interest income
to be increased on our variable interest rate portfolio. Offsetting the
effects of the increased portfolio and interest rates was a reduction in the
recognition of commitment fee income. During the year ended December 31, 1999
we recognized approximately $1,685,000 of up-front fees compared to $432,000 in
up-front fees during the year ended December 31, 2000. The decrease of
$1,253,000 in commitment fees is attributable to fewer loan originations during
the year ended December 31, 2000 (a reduction of approximately $40.1 million)
when compared to the year ended December 31, 1999.

Interest on other investments (which consists of interest on temporary
investments) for the year ended December 31, 2000 was $480,000 which was
$793,000 (62%) less than the $1,273,000 in interest income on other investments
earned during the year ended December 31, 1999. The decrease relates to a
decrease in temporary investments outstanding. From June 1999 through December
1999 we had a significant portion of the proceeds from our loan sale invested
in temporary investments until we originated new loans. As a result, the
weighted average temporary investments decreased by $16.3 million (52.6%) from
$31.0 million during the year ended December 31, 1999 to $14.7 million during
the year ended December 31, 2000.

Income from retained interests in transferred assets:Income from
retained interests in transferred assets increased by $553,000 (16%), from
$3,467,000 for the year ended December 31, 1999 to $4,020,000 for the year
ended December 31, 2000. The income from retained interests in transferred
assets is comprised of the yield received from our investment in our Retained
Interests. This increase was primarily a result of the income from the
Retained Interests from our securitization completed in June 1999. We owned
this investment for a full year during the year ended December 31, 2000
compared to a half a year during the year ended December 31, 1999.

Premium income:Premium income decreased by $517,000 (47%), from
$1,090,000 for the year ended December 31, 1999 to $573,000 for the year ended
December 31, 2000. The decrease was primarily a result of

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reduced loan sales to the secondary market. Our sale of the government
guaranteed portion of loans (under the SBA 7(a) program) decreased from $19.2
million during the year ended December 31, 1999 to $9.6 million during the year
ended December 31, 2000. The number and dollar volume of loans originated, and
as a consequence sold, by First Western under the SBA 7(a) program decreased
during the year ended December 31, 2000. The decrease in volume primarily
relates to an increase in competition from alternative loan products. These
other products often provide prospective borrowers with fixed interest rates at
less than the floating interest rates available through the SBA 7(a) program.
In 2000, we continued to face increased competition to originate SBA 7(a)
program loans from other SBA 7(a) program lenders as well as lenders providing
alternative loan products.

Other investment income, net:Other investment income, net, decreased by
$20,000 (2%), from $843,000 for the year ended December 31, 1999 to $823,000
for the year ended December 31, 2000. Other investment income includes fee
income related to our loans and was comparable during the years ended December
31, 2000 and 1999.

Other income, net:Other income, net, decreased by $172,000 (7%), from
$2,320,000 during the year ended December 31, 1999 to $2,148,000 during the
year ended December 31, 2000. Other income, which primarily consists of income
relating to the advisory services provided to PMC Commercial, was reduced
during the year ended December 31, 2000 as a result of the reduced fee
structure and portfolio managed for PMC Commercial. During the year ended
December 31, 1999 and during the six months ended June 30, 2000, we charged
fees between 0.40% and 1.67% annually, based upon the average principal
outstanding of loans under management pursuant to the IMAs. Effective July 1,
2000, the highest fee chargeable by PMC Advisers under the IMAs was reduced
from 1.67% to 1.55%. The reduction in management fee income was lessened by
$100,000 due to the fee earned on the placement of PMC Commercials loans into
the 2000 Joint Venture.

Equity in income (loss) of unconsolidated subsidiaries: As a BDC, we do
not consolidate the operations of our non-investment company subsidiaries.
Instead we are required to recognize the income of our non-investment company
subsidiaries under the equity method of accounting. Earnings of our
unconsolidated subsidiaries, not including the SPEs established by us in
connection with the structured sales of our loans, are reflected as a single
line item (Equity in income (loss) of unconsolidated subsidiaries) on our
consolidated statements of income.

Equity in income (loss) of unconsolidated subsidiaries decreased by
$232,000 (33%), from $712,000 during the year ended December 31, 1999 to
$480,000 during the year ended December 31, 2000.

The decrease was a result of the following:



| |  |  | The net income of PMC Advisers was $495,000 during the year
ended December 31, 2000 compared to $561,000 during the year ended
December 31, 1999. The decrease was primarily a result of $81,000
in fees earned by PMC Advisers related to the acquisition by PMC
Commercial of four properties during the year ended December 31,
1999. There was no comparable transaction during the year ended
December 31, 2000.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | PMC Funding had a loss of $15,000 during the year ended
December 31, 2000 as compared to a $151,000 gain during the year
ended December 31, 1999. The primary reason for the change was the
recognition of a gain on the sale of an asset during the first
quarter of 1999. There was no comparable transaction during the
year ended December 31, 2000.                                                             

Operating expenses, not including interest expense:Operating expenses,
not including interest, increased by $70,000 (1%), from $5,827,000 during the
year ended December 31, 1999 to $5,897,000 during the year ended December 31,
2000. Operating expenses are comprised of salaries and related benefits,
general and administrative, profit sharing plan, rent, legal and accounting,
SBA fees and directors and shareholders expense. The largest operating expense
is salaries and related benefits which consist of salaries for our officers and
employees who provide all of our management, advisory and portfolio functions,
including marketing, servicing, accounting and portfolio analysis. We had an
increase in salaries and related benefits of $133,000 (3%), from $4,049,000
during the year ended December 31, 1999 to $4,182,000 during the year ended
December 31, 2000. The increase in salaries and related benefits was primarily
attributable to an increase in our marketing staff attributable to new loan
production offices.

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Interest expense:Interest expense increased by $70,000 (1%), from
$5,313,000 during the year ended December 31, 1999 to $5,383,000 during the
year ended December 31, 2000. Interest expense results primarily from interest
on (i) the Companys $41.7 million of unsecured notes payable with a weighted
average interest rate of 7.7% and weighted average remaining maturity of 3.0
years as of December 31, 2000, (ii) $31.3 million of SBA debentures, with a
weighted average interest rate of approximately 7.6% (including SBA annual fees
on debentures issued during 2000) and weighted average remaining maturity of
5.6 years as of December 31, 2000, and (iii) balances outstanding on our
revolving credit facility. While we have borrowed on this facility during the
year ended December 31, 2000, we did not have any borrowings outstanding at
December 31, 2000.

Activity relating to our outstanding debt was as follows:



| |  |  | During July 1999, we issued an additional $3.3 million in senior debt,                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the year ended December 31, 1999 we
repaid at maturity $4.1 million in SBA debentures,                                                                   
|
| |  |  | During the year ended December 31, 2000 we repaid at maturity $11.6 million of
SBA debentures.                                                                  
|
| |  |  | During July 2000, we issued an additional $3.3 million in senior debt,                                                                                          
|
| |  |  | During the third quarter of 2000, we issued $7.3 million of SBA debentures, and                                                                                 
|
| |  |  | The subsidized rate on $12 million of SBIC
debentures expired during the year ended December 31, 2000
and the interest rate on these debentures increased by 3%.

Realized and unrealized
gain (loss) on investments:Realized and
unrealized gain (loss) on investments decreased from a gain of $1,933,000
during the year ended December 31, 1999 to a gain of $949,000 during the year
ended December 31, 2000.

The most significant reason for this decrease in net realized and
unrealized gain (loss) on investments was the reduction in the amount of gain
recognized on our securitization transactions. During the year ended December
31, 2000 we recognized approximately $564,000 relating to the sale of $28.1
million of loans during December 2000 compared to a gain of $2,564,000
recognized from the securitization and sale of $60.3 million of loan portfolio
during June 1999. The reduction of $2,000,000 was due to a decrease in the
principal sold of approximately $32.2 million and the reduced net interest
spread. The net interest spread is the difference between the weighted
average interest rate on the sold loans compared to the coupon rate on the debt
issued by the SPE. We generated a net interest spread of 2.99% related to our
1999 securitization compared to a net interest spread of 2.26% related to our
2000 securitization.

During the year ended December 31, 1999, we recognized net realized and
unrealized losses (excluding the gain relating to our securitization
transaction discussed above) of $631,000 compared to net realized and
unrealized gains of $385,000 during the year ended December 31, 2000. During
the year ended December 31, 1999, we recognized $500,000 in valuation losses
relating to Retained Interests. The primary reason for the valuation losses
during the year ended December 31, 1999 was increased prepayment of principal
on the underlying pool of variable rate loans originated by First Western.
During the year ended December 31, 2000 we recognized $871,000 in valuation
gains relating to our Retained Interests. The primary reason for the net gains
during the year ended December 31, 2000 was the continued lower than previously
anticipated rate of prepayment activity and less than anticipated loss activity
related to the structured loan sale of fixed interest rate loans completed in
June 1999. With respect to the loans securitized and sold in June 1999, we did
not have any loans that prepaid during the year ended December 31, 2000 and we
did not have any loans that were charged-off or that required a loan loss
provision to be established.

We also recognized $131,000 of net realized and unrealized loan valuation
losses during the year ended December 31, 1999 compared to $486,000 in net
realized and unrealized loan valuation losses during the year ended December
31, 2000. The increase was primarily a result of valuation reserves
established on problem loans identified during the third and fourth quarter of
2000. Loan losses (including the change in unrealized appreciation
(depreciation) on loans) were 0.41% and 0.13% of our weighted average
outstanding portfolio during the years ended December 31, 2000 and 1999,
respectively.

25



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Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

Net income decreased by $529,000 (4%), from $13,949,000 million during the
year ended December 31, 1998 to $13,420,000 during the year ended December 31,
1999. As described in more detail below, net operating income for the year
ended December 31, 1999 is down $1,736,000 (13%) compared to 1998 mainly due to
a reduction in interest income of approximately $1.9 million (11%) offset by an
increase in premium income of $314,000. For the year ended December 31, 1999,
our net realized and unrealized gain on investments was up approximately $1.2
million (166%) primarily as a result of an increased gain on sale of assets of
approximately $1.6 million (173%) offset by increased unrealized and realized
losses on investments of $432,000 (200%).

Interest income:Interest income decreased by $2,312,000 (14%), from
$16,507,000 for the year ended December 31, 1998 to $14,195,000 for the year
ended December 31, 1999. Interest income includes the interest earned on
loans, the interest earned on temporary investments and up-front fees
collected. This overall decrease was primarily attributable to a decline in
interest rates on new loan originations and the structured sale of $40 million
in loans in November 1998 and $60 million in loans during June 1999.

Interest income on loans decreased by $3,007,000 (19%), from $15,929,000
during the year ended December 31, 1998 to $12,792,000 during the year ended
December 31, 1999. The decrease in interest income on loans was primarily a
result of the decrease in the weighted average outstanding principal amount of
loans which decreased as a result of the structured loan sales in November 1998
and June 1999. The average retained loan portfolio decreased by 23% to $103.1
million during the year ended December 31, 1999 from $134.4 million during the
year ended December 31, 1998. The decrease in interest income was also caused
by a continuation of lower interest rates charged on new loan originations and
the prepayment of our higher interest rate loans. As general lending
competition has increased, the rate that we were able to charge decreased while
prepayments increased. Hospitality lending competition has increased primarily
from local and regional banks and through loan programs of major investment
banks (commonly known as conduit programs). The proceeds from the
prepayments were invested initially in temporary investments and, to the extent
we originated fixed interest rate loans, have been re-loaned at these
competitive, lower interest rates. The weighted average interest rate on our
retained loan portfolio remained constant at 10.0% as of December 31, 1999 and
1998.

Interest on other investments for the year ended December 31, 1999 was
$1,273,000, which was $695,000 greater than the $578,000 in interest income on
other investments earned during the year ended December 31, 1998. This increase
was primarily due to (i) the greater daily balances in short-term investments
and cash and cash equivalents as a result of the structured loan sales in
November 1998 and June 1999. The average outstanding temporary investments
fluctuate based on the size and timing of receipt of capital resources and the
volume of loan originations and prepayment activities.

Income from retained interests in transferred assets:Income from
retained interests in transferred assets increased by $206,000 (6%), from
$3,261,000 during the year ended December 31, 1998 to $3,467,000 during the
year ended December 31, 1999. The increase was primarily a result of the
completion of a securitization during June 1999. The revenue generated from
the Retained Interests relating to the securitization in June 1999 was
approximately $708,000 during the year ended December 31, 1999.

Premium income:Premium income increased by $314,000 (40%), from
$776,000 for the year ended December 31, 1998 to $1,090,000 for the year ended
December 31, 1999. This increase was primarily attributable to an increase in
loans funded under our SBA 7(a) program and sold into the secondary market
during 1999 when compared to 1998. Early in 1999, we refocused our marketing
effort on SBA 7(a) lending. As a result, funding and loan sales of SBA 7(a)
loans increased during 1999. We expect that these marketing efforts will allow
us to maintain a higher level of SBA 7(a) lending during 2000. The proceeds
from the sale of the government guaranteed portion of loans (under the SBA 7(a)
program) increased by $9.2 million (92%) from $10.0 million during the year
ended December 31, 1998 to $19.2 million during the year ended December 31,
1999. Offsetting a portion of the increase in premium income was the diminished
premiums paid by purchasers of government guaranteed loans.

Other investment income, net:Other investment income remained
relatively constant at $843,000 and $807,000 for the years ended December 31,
1999 and 1998, respectively.

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Other income, net:Other income, net, decreased by $573,000 (21%), from
$2,893,000 during the year ended December 31, 1998 to $2,320,000 during the
year ended December 31, 1999. Other income during the year ended December 31,
1998 included $633,000 in fee income earned by PMC Advisers related to the
completion of a structured sale of loans by PMC Commercial and fees related to
the acquisition by PMC Commercial (during June 1998) of properties. Since
there was no comparable recognition of income in 1999 other than $81,000 in
fees related to the acquisition of properties by PMC Commercial, other income
was significantly lower. In addition, during the third quarter of 1998, we
recognized income related to a loan which paid-off in full that had been
acquired at a discount.

Equity in income of unconsolidated subsidiaries:As a BDC, we do not
consolidate the operations of our non-investment company subsidiaries. Instead
we are required to recognize the income of our non-investment company
subsidiaries under the equity method of accounting. Earnings of our
unconsolidated subsidiaries, not including the Limited Partnerships established
by us in connection with the structured sales of our loans, are reflected as a
single line item (Equity in income of unconsolidated subsidiaries) on our
consolidated statements of operations.

Equity in income of unconsolidated subsidiaries increased by $642,000
(19%), from $70,000 during the year ended December 31, 1998 to $712,000 during
the year ended December 31, 1999.

The net income of PMC Advisers was $561,000 during the year ended December
31, 1999 compared to $179,000 during the year ended December 31, 1998. The
increase was primarily related to fees generated by the property management
agreement entered into in June 1998 with PMC Commercial.

In addition, PMC Funding had a gain of $151,000 during the year ended
December 31, 1999 as compared to a $109,000 loss during the year ended December
31, 1998. The primary reason for this change was the recognition of a gain on
the sale of an asset during the first quarter of 1999.

Operating expenses, not including interest:Operating expenses, not
including interest, increased by $203,000 (4%) from $5,624,000 during the year
ended December 31, 1998 to $5,827,000 during the year ended December 31, 1999.
Operating expenses are comprised of salaries and related benefits, general and
administrative, profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense. The largest operating expense is salaries
and related benefits which consist of salaries for our officers and employees
who provide all of the management, advisory, and portfolio functions, including
marketing, servicing, accounting and portfolio analysis. It is anticipated
that operating expenses will remain at or near present levels during the year
ending December 31, 2000.

Interest expense:Interest expense decreased by $154,000 (3%) from
$5,467,000 during the year ended December 31, 1998 to $5,313,000 during the
year ended December 31, 1999. Interest expense results primarily from interest
on (i) our $38.3 million of unsecured notes with a weighted average interest
rate of 7.4% and weighted average remaining maturity of 3.2 years as of
December 31, 1999, and (ii) $35.6 million of debentures due to the SBA as a
result of borrowings made by the our subsidiaries, with a weighted average
interest rate of approximately 6.7% and weighted average remaining maturity of
3.4 years as of December 31, 1999. The reduction in interest expense was due to
the repayment of SBA debentures during 1998 and 1999. During September and
December 1999, we repaid at maturity $3.2 million and $1.0 million in SBA
debentures. We also repaid approximately $1.5 million in SBA debentures at
maturity during February 1998. Partially offsetting the decrease in interest
expense was an additional $3.3 million in senior debt borrowed in July 1999.

Realized and unrealized gain (loss) on investments:Realized and
unrealized gain (loss) on investments changed from a gain of $726,000 during
the year ended December 31, 1998 to a gain of $1,933,000 during the year ended
December 31, 1999. The primary reason for this increase in net gain was the
difference in the gain recognized on the structured loan sale during the year
ended December 31, 1999 as compared to the gain recognized on the structured
loan sale during the year ended December 31, 1998.

We recorded a gain of $925,000 at the time we completed the structured
sale of $40 million in loans during November 1998. Due to market conditions at
the time of the sale, the net difference (spread) between our sold assets and
the coupon paid by the purchasers of the assets was approximately 2%. The
structured loan sale in 1999

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was for $60 million and market conditions had improved resulting in a spread of
approximately 3%. The result was the recognition of $2,564,000 at the time of
sale, which is $1,639,000 greater than the gain recognized from the 1998
structured loan sale.

Offsetting a portion of the gain from sale of assets was the change in
recorded realized and unrealized gains (losses) relating to our Retained
Interests. During the year ended December 31, 1998, we recognized net gains of
$500,000 compared to net losses of $120,000 during the year ended December 31,
1999. The primary reason for the net losses in 1999 was increased prepayment
speeds primarily during the second and fourth quarters of the year.

We also recognized $319,000 of loan valuation losses and loans written-off
during the year ended December 31, 1998 compared to $131,000 during the year
ended December 31, 1999. Loan losses were minimal during each of the years
ended December 31, 1999 and 1998.

Cash Flow Analysis

Cash Flow From Operating Activities:We generated cash flow from
operating activities of $8,636,000 and $10,155,000 during the years ended
December 31, 2000 and 1999, respectively. This decrease of $1,519,000
primarily relates to the decrease in net income of $2,167,000.

Cash Flow From Investing Activities:We used cash of $21,377,000 and
$47,917,000 from investing activities during the years ended December 31, 2000
and 1999, respectively. This $26,540,000 decrease in cash flows used in
investing activities relates primarily to a net decrease in loans funded less
principal collected of $25,206,000. During the year ended December 31, 2000,
we funded $29,404,000 less than the year ended December 31, 1999.

Cash Flow From Financing Activities:We had a source of funds of
$42,230,000 provided during the year ended December 31, 1999 compared to a
source of funds of $11,457,000 from financing activities during the year ended
December 31, 2000. The primary reason for the decrease in source of funds was
the receipt of $55,649,000 in net proceeds from the 1999 Partnership related to
the sale of loans to the 1999 Partnership compared to $24,955,000 in net
proceeds from the 2000 Joint Venture related to the sale of loans to the 2000
Joint Venture.

Liquidity and Capital Resources

As a regulated investment company, pursuant to the Internal Revenue Code,
we are required to pay out substantially all of our net investment company
taxable income to our common shareholders (see Dividends below).
Consequently, we must procure funds from sources other than earnings in order
to meet our capital requirements. In addition, as a BDC, we are generally
required to maintain a ratio of at least 200% of total assets to total
borrowings, which may restrict our ability to borrow in certain circumstances.

Our primary use of funds is to originate loans. We also expend funds
primarily for payment of:



| |  |  | dividends to shareholders,                             
| | - |  | -------------------------------------------------------
|
| |  |  | principal payments on borrowings,                      
|
| |  |  | interest and related financing costs, and              
|
| |  |  | salaries and other general and administrative expenses.

Historically, our sources of capital and liquidity have been:



| |  |  | the structured sale or securitization of a portion of our loan portfolio,
| | - |  | -------------------------------------------------------------------------
|
| |  |  | debentures issued through programs of the SBA,                           
|
| |  |  | private and public issuances of common stock,                            
|
| |  |  | the issuance of senior unsecured medium-term notes, and                  
|
| |  |  | the utilization of our short-term, unsecured revolving credit facility.  

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Our primary source of capital has most recently been through the
structured sale of loans. In order to generate growth in the size of our
investment portfolio and meet our outstanding loan commitments, we will need to
obtain additional funds from:



| |  |  | securitization and sale of a portion of the loan portfolio,
| | - |  | -----------------------------------------------------------
|
| |  |  | borrowings under our credit facility,                      
|
| |  |  | medium-term debt offerings, and/or                         
|
| |  |  | the issuance of equity .                                   

At December 31, 2000, we had approximately $22 million of cash and cash
equivalents, availability of $15 million under our revolving credit facility
and approximately $32 million of total loan commitments and approvals
outstanding (see Commitments below). In order to meet these commitments and
fund our anticipated volume of loan originations during 2001, we anticipate the
full utilization of our cash and cash equivalents on hand and our $15 million
revolving credit facility. In addition, we anticipate the need to complete a
securitization transaction towards the latter part of the year. At present, we
have an available loan pool of greater than $40 million that could be used in a
securitization transaction. We have received the required exemptive relief
from the Securities and Exchange Commission to permit us to co-securitize our
loan portfolio with PMC Commercial, thereby allowing us to achieve a more
cost-efficient cost of funds, a lower retained interest in loans securitized
and more timely access to the securitization market.

Additional sources of capital include principal collections on our
existing loan portfolio and proceeds from the sale of SBA 7(a) loans in the
secondary market. To the extent commitments pertain to PMCIC or Western
Financial, we should be able to issue SBA debentures to fund those commitments.

There can be no assurances that we will be able to complete the above
transactions at acceptable advance rates and/or interest rates. If not, we may
have to refer commitments to PMC Commercial, issue debt at decreased
loan-to-value ratios or increased interests rates and/or sell assets to meet
our committed obligations when and if they come due. Management believes that
these financing sources will enable us to generate funds sufficient to meet
both our short-term and long-term capital needs.

Commitments:

Loan commitments outstanding at December 31, 2000 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $32.2 million. Of these
commitments, $11.4 million were for loans partially guaranteed by the SBA of
which approximately $9.0 million would be sold (when fully funded) into the
secondary market. Such commitments are made in the ordinary course of our
business. Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met. Commitments
generally have fixed expiration dates and require payment of a fee. Since some
commitments expire without the proposed loan closing, the total commitment
amounts do not necessarily represent future cash requirements.

Economy and Competition:

Our primary competition has come from banks, financial institutions and
other lending companies. Some of these competitors have greater financial and
larger managerial resources than us and are able to provide services we are not
able to provide (i.e.depository services). During 2000, competition increased
as the financial strength of the banking and thrift industries improved and
interest rates remained high. In our opinion, during this period there was
competitive lending activity at advance rates and interest rates that were
considerably more aggressive than those offered by us. In order to maintain a
quality portfolio, we continued to adhere to our historical underwriting
criteria, and as a result, certain loan origination opportunities were not
funded by us. We believe we compete effectively with such entities on the
basis of the variety of our lending programs offered, the interest rates, our
long-term maturities and payment schedules, the quality of our service, our
reputation as a lender, the timely credit analysis and decision-making
processes, and the renewal options available to borrowers.

As a result of uncertain economic trends and overbuilding in certain
regional markets, there is a slowdown in the number of new hospitality
properties that are being built or sold. Due to the competition noted above
and the

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slowdown in construction of new limited service hospitality properties, our
loan origination volume declined to $44.1 million in 2000 from $84.3 million in
1999. However, since the beginning of 2001, we have seen an increase in loan
origination opportunities due to the reductions in prime rate during the first
quarter of 2001 and competition lessening from banks. Based on this increased
activity, we expect the volume of new loans funded in 2001 to exceed our 2000
level of $44.1 million but be less than our 1999 level of $86.4 million.

Debt:

At December 31, 2000, we had no balance outstanding under our revolving
credit facility, and had availability of $15.0 million. Advances pursuant to
the credit facility bear interest at our option at either the lenders prime
rate less 50 basis points or LIBOR plus 175 basis points. The credit facility
requires we meet certain covenants, the most restrictive of which provides that
the ratio of net charge-offs to net loans receivable may not exceed 2%, and the
ratio of assets to senior debt (as defined in the credit facility) will not
fall below 135% with respect to PMC Capital and 150% including our consolidated
subsidiaries. At December 31, 2000 we were in compliance with all covenants of
this facility.

We had $6.7 million in senior notes which matured and were repaid in July
2000 and $6.7 million in senior notes that mature in July 2001. The $6.7
million in senior notes due July 2000 were rolled over into new senior notes at
which time we borrowed an additional $3.3 million. This $10 million in senior
notes mature in July 2004 and bear interest at LIBOR plus 1.4% reset on a
quarterly basis. We repaid $11.6 million in SBA debentures at their maturity
during the year ended December 31, 2000 and issued $7,310,000 in SBA debentures
with a coupon rate of 8.452% (including the mandatory SBA 1% annual fee).

Investment Company Act requirements:

PMC Capital is in compliance with the requirement to maintain a minimum of
200% asset coverage of debt as defined in sections 18 and 61 of the 1940 Act as
modified by exemptive orders obtained by us from the Securities and Exchange
Commission.

Dividends:

PMC Capital has historically paid at least 100% of its investment company
taxable income. There are certain timing differences between book and tax
income, most notably the recognition of income relating to our securitizations.
As a result of these timing differences and the anticipation of cash flows
from our unconsolidated subsidiaries, the payment and amount of dividends does
not necessarily coincide with our earnings and we may have a distribution of
dividends in excess of our net operating income. In addition, our dividends
paid since we became an investment company exceeded our earnings and profits
for tax purposes. During 2000, we recognized a 22.5% return of capital for
dividend reporting purposes. The computation of return of capital provides for
several timing differences, most notably relating to the recognition of gain
treatment on securitization transactions.

Each of the quarterly dividends paid during 1999 and 2000 were $0.25 per
share with an additional special dividend of $0.015 per share declared in
December 1999 and paid in January 2000. Our Board of Directors may amend our
dividend policy as warranted by actual and/or anticipated earnings. To the
extent the income from operations in future periods does not increase and
continues at a rate which is less than the present stabilized dividend level, a
portion of the dividends received in 2001 will be a return of capital unless
the Board of Directors reduces the dividend level. In March 2001, the Board
declared a dividend of $0.25 per share to shareholders of record on March 31,
2001, payable in April 2001. In the absence of unforeseen events, the Board
has determined that the present level of quarterly dividends will be adjusted
commencing with the dividend payable in July 2001. At that time, we anticipate
that the quarterly dividend will be reduced to a range between $0.18 per share
and $0.22 per share.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to market risk associated with changes in interest
rates since our balance sheet consists of items subject to interest
rate risk.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A majority of our investment portfolio (approximately 70%) consists of
fixed interest rate loans. Given that the loans are priced at a fixed
rate of interest, changes in interest rates should not have a direct
impact on interest income. Changes in market interest rates are
considered by the Board of Directors in its determination of fair value
of our loans. To date, changes in market interest rates have not had a
significant affect on the Board of Directors determination. However,
future interest rate changes could have an impact. Significant
reductions in interest rates, however, can prompt increased prepayments
of our loans, resulting in possible decreases in long-term revenues due
to the re-lending of the prepayment proceeds at lower interest rates
(See Item 1. Risk Factors Interest Rate and Prepayment Risk).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of our variable-rate portfolio and debt, our sensitivity to
changes in interest rates is regularly monitored and analyzed by
measuring the characteristics of our assets and liabilities. We assess
interest rate risk in terms of the potential effect on interest income
net of interest expense, the value of net assets and the value at risk
in an effort to ensure that we are insulated from any significant
adverse effects from changes in interest rates. Based on our analysis
of the sensitivity of interest income net of interest expense, if the
balance sheet were to remain constant and no actions were taken to
alter the existing interest rate sensitivity, a hypothetical immediate
100 basis point change in interest rates would have affected net income
by approximately 1.5% over a one year period.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have an investment in Retained Interests which is valued by our
Board of Directors based on various factors including estimates of
appropriate market discount rates. Significant reductions (or
increases) in the discount rates used by the Board of Directors in
determining the valuation of the Retained Interests will have an impact
on the value. If market rates, and consequently the discount rates
used by the Board, were to increase by 1% or 2% from current rates, the
value of our Retained Interests would diminish by $1.5 million and $2.4
million, respectively.



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, our liabilities include debt payable to the SBA and our
senior unsecured debt. The SBA debentures and the senior unsecured
debt are primarily payable at fixed rates of interest, so changes in
interest rates do not affect our interest expense (See  Risk Factors
- Leverage and Interest Rate and Prepayment Risk).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although management believes that the above described measures are
indicative of our sensitivity to interest rate changes, it does not
adjust for potential changes in credit quality, size and composition of
our balance sheet and other business developments that could affect our
net income. Accordingly, no assurances can be given that actual
results would not differ materially from the potential outcome
simulated by these estimates.




Item 8.     CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | The financial statements and supplementary data are included in this report beginning on page F-1.




Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                 FINANCIAL DISCLOSURE



| |     
| | ----
| | None

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PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
year end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 16, 2001.




Item 11. EXECUTIVE COMPENSATION

Incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
year end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 16, 2001.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
year end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 16, 2001.




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
year end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 16, 2001.

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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| |                                            
| | -------------------------------------------
| | (a) Documents filed as part of this report:



| |                         
| | ------------------------
| | (1) Financial Statements



| |                                                                           
| | --------------------------------------------------------------------------
| | See index to Financial Statements set forth on page F-1 of this Form
10-K.



| |                                  
| | ---------------------------------
| | (2) Financial Statement Schedules



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules are omitted because they are not required
under the related instructions or not applicable, or because
the required information is included in the consolidated
financial statements or notes thereto.



| |             
| | ------------
| | (3) Exhibits



| |                                                           
| | ----------------------------------------------------------
| | See Exhibit Index beginning on page E-1 of this Form 10-K.



| |                         
| | ------------------------
| | (b) Reports on Form 8-K:



| |     
| | ----
| | None

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) or the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

| |                                                                   
| | ------------------------------------------------------------------
| | PMC Capital, Inc.                                                 
|
| | By: /s/ Lance B. Rosemore
            Lance B. Rosemore, President

Dated March 30, 2001

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

|                                                    |  |                                                                                          |  |               
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | --------------
|Name                                                |  | Title                                                                                    |  | Date          
|                                                   
|/S/ DR. FREDRIC M. ROSEMORE
DR. FREDRIC M. ROSEMORE |  | Chairman of the Board
and Treasurer                                                      |  | March 30, 2001
|                                                   
|/S/ LANCE B. ROSEMORE
LANCE B. ROSEMORE             |  | President, Chief Executive
Officer, Secretary and Director
(Principal Executive Officer) |  | March 30, 2001
|                                                   
|/S/ BARRY N. BERLIN
BARRY N. BERLIN                 |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)                     |  | March 30, 2001
|                                                   
|/S/ DR. MARTHA GREENBERG
DR. MARTHA GREENBERG       |  | Director                                                                                 |  | March 30, 2001
|                                                   
|/S/ DR. IRVIN BORISH
DR. IRVIN BORISH               |  | Director                                                                                 |  | March 30, 2001
|                                                   
|/S/ THOMAS HAMILL
THOMAS HAMILL                     |  | Director                                                                                 |  | March 30, 2001
|                                                   
|/S/ BARRY A. IMBER
BARRY A. IMBER                   |  | Director                                                                                 |  | March 30, 2001
|                                                   
|/S/ BARRY A. CHAFITZ
BARRY A. CHAFITZ               |  | Director                                                                                 |  | March 30, 2001

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PMC CAPITAL, INC AND SUBSIDIARIES
FORM 10-K




PMC CAPITAL, INC AND SUBSIDIARIES

|                                          |                                                                                                      |  |     |      | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------- |  | --- | ---- | 
|Summary of Selected Financial Information |                                                                                                      |  | F-2 |     
|                                         
|Quarterly Statistics                      |                                                                                                      |  | F-3 |     
|                                         
|Report of Independent Accountants         |                                                                                                      |  | F-4 |     
|                                         
|Consolidated Financial Statements:       
|                                         
|                                          | Financial Highlights                                                                                 |  |     | F-5  | 
|                                         
|                                          | Consolidated Balance Sheets as of December 31, 2000 and 1999                                         |  |     | F-6  | 
|                                         
|                                          | Consolidated Schedule of Investments as of December 31, 2000                                         |  |     | F-7  | 
|                                         
|                                          | Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998               |  |     | F-9  | 
|                                         
|                                          | Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2000, 1999 and 1998 |  |     | F-10 | 
|                                         
|                                          | Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998           |  |     | F-11 | 
|                                         
|                                          | Notes to Consolidated Financial Statements                                                           |  |     | F-12 | 
|                                         
|Consolidating Financial Statements:      
|                                         
|                                          | Report of Independent Accountants on Consolidating Financial Statements                              |  |     | F-31 | 
|                                         
|                                          | Consolidating Balance Sheet as of December 31, 2000                                                  |  |     | F-32 | 
|                                         
|                                          | Consolidating Statement of Income for the Year Ended December 31, 2000                               |  |     | F-33 | 
|                                         
|                                          | Consolidating Statement of Shareholders Equity for the Year Ended December 31, 2000                 |  |     | F-34 | 
|                                         
|                                          | Consolidating Statement of Cash Flows for the Year Ended December 31, 2000                           |  |     | F-35 | 

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




SUMMARY OF SELECTED FINANCIAL INFORMATION

|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |         |        | 
|----------------- | --------------------------------------------------------------------------- | -------------------------- | - | -------------------------------------------------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                  |                                                                             |                            |   | Years Ended December 31,                          
|                  |                                                                             |                            |   |                                                   
|                  |                                                                             |                            |   | 2000                                               |        | 1999 |   | 1998    |        | 1997 |   | 1996   
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |        
|                  |                                                                             |                            |   | ( In thousands, except per share data and ratios )
|Operating:       
|                 
|                 
|                 
|                 
|                  | Operating income                                                            |                            | $ | 21,584                                             |        |      | $ | 22,627  |        |      | $ | 24,314  |        |  | $ | 24,406  |        |  | $ | 23,821  |       
|                 
|                 
|                 
|                 
|                  | Operating expenses                                                          |                            |   | (11,280                                            | )      |      |   | (11,140 | )      |      |   | (11,091 | )      |  |   | (10,602 | )      |  |   | (10,454 | )     
|                 
|                 
|                 
|                 
|                  | Realized and unrealized gain (loss)
on investments                          |                            |   | 949                                                |        |      |   | 1,933   |        |      |   | 726     |        |  |   | 1,818   |        |  |   | (147    | )     
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Net operating income and realized
and unrealized gain (loss) on investments |                            | $ | 11,253                                             |        |      | $ | 13,420  |        |      | $ | 13,949  |        |  | $ | 15,622  |        |  | $ | 13,220  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  |                                                                             | Dividends declared, common |   | $                                                  | 11,846 |      |   | $       | 12,007 |      |   | $       | 14,473 |  |   | $       | 14,543 |  |   | $       | 12,853 | 
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Earnings per common share                                                   |                            | $ | 0.93                                               |        |      | $ | 1.11    |        |      | $ | 1.16    |        |  | $ | 1.35    |        |  | $ | 1.18    |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Dividends per common share                                                  |                            | $ | 1.00                                               |        |      | $ | 1.02    |        |      | $ | 1.23    |        |  | $ | 1.27    |        |  | $ | 1.16    |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Weighted average common shares
outstanding                                  |                            |   | 11,841                                             |        |      |   | 11,829  |        |      |   | 11,800  |        |  |   | 11,411  |        |  |   | 11,002  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Loans funded                                                                |                            | $ | 44,158                                             |        |      | $ | 84,264  |        |      | $ | 66,450  |        |  | $ | 86,361  |        |  | $ | 70,154  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|At end of period:
|                 
|                 
|                 
|                 
|                  | Loans receivable, net                                                       |                            | $ | 100,353                                            |        |      | $ | 106,325 |        |      | $ | 116,711 |        |  | $ | 127,240 |        |  | $ | 93,354  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Total assets                                                                |                            | $ | 161,478                                            |        |      | $ | 165,191 |        |      | $ | 163,349 |        |  | $ | 165,839 |        |  | $ | 164,964 |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Notes and debentures payable                                                |                            | $ | 72,977                                             |        |      | $ | 73,973  |        |      | $ | 74,790  |        |  | $ | 76,290  |        |  | $ | 79,570  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Preferred stock of consolidated subsidiary                                  |                            | $ | 7,000                                              |        |      | $ | 7,000   |        |      | $ | 7,000   |        |  | $ | 7,000   |        |  | $ | 7,000   |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Common shareholders equity                                                 |                            | $ | 72,667                                             |        |      | $ | 73,314  |        |      | $ | 72,151  |        |  | $ | 70,166  |        |  | $ | 62,903  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Number of common shares outstanding                                         |                            |   | 11,854                                             |        |      |   | 11,829  |        |      |   | 11,829  |        |  |   | 11,631  |        |  |   | 11,162  |       
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|Ratios:          
|                 
|                 
|                 
|                 
|                  | Return on average assets (1)                                                |                            |   | 6.9                                                | %      |      |   | 8.2     | %      |      |   | 8.5     | %      |  |   | 9.7     | %      |  |   | 8.3     | %     
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Return on average common shareholders
equity (2)                           |                            |   | 15.1                                               | %      |      |   | 18.1    | %      |      |   | 19.2    | %      |  |   | 23.3    | %      |  |   | 21.3    | %     
|                  |                                                                             |                            |   |                                                    |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        



|(1) |  | Based on the average value of assets which is the our total assets on the
the first day of the year and on the last day of each quarter of the
year, divided by five.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Based on the total shareholders equity on the the first day of the year and
on the last day of each quarter of the year, divided by five.                           

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




|                                                     |                                      |   |         |  |         |   |         |  |       |   |       |  |  |   |       |  |  |   |        | 
|---------------------------------------------------- | ------------------------------------ | - | ------- |  | ------- | - | ------- |  | ----- | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                                     | FOR THE YEAR ENDED DECEMBER 31, 2000
|                                                     |                                     
|                                                     | First                                |   | Second  |  | Third   |   | Fourth 
|                                                     | Quarter                              |   | Quarter |  | Quarter |   | Quarter |  | Total
|                                                     |                                      |   |         |  |         |   |         |  |      
|Operating income                                     |                                      | $ | 5,161   |  |         | $ | 5,303   |  |       | $ | 5,210 |  |  | $ | 5,910 |  |  | $ | 21,584 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net operating income                                 |                                      | $ | 2,478   |  |         | $ | 2,624   |  |       | $ | 2,395 |  |  | $ | 2,807 |  |  | $ | 10,304 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net gain (loss) on investments                       |                                      | $ | 138     |  |         | $ | 80      |  |       | $ | 59    |  |  | $ | 672   |  |  | $ | 949    | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net increase in net assets
resulting from operations |                                      | $ | 2,616   |  |         | $ | 2,704   |  |       | $ | 2,454 |  |  | $ | 3,479 |  |  | $ | 11,253 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                     
|                                                     | PER SHARE                           
|                                                     |                                     
|                                                    
|                                                    
|                                                    
|                                                    
|Operating income                                     |                                      | $ | 0.436   |  |         | $ | 0.448   |  |       | $ | 0.440 |  |  | $ | 0.500 |  |  | $ | 1.824  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net operating income                                 |                                      | $ | 0.209   |  |         | $ | 0.222   |  |       | $ | 0.202 |  |  | $ | 0.237 |  |  | $ | 0.870  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net gain (loss) on investments                       |                                      | $ | 0.012   |  |         | $ | 0.007   |  |       | $ | 0.005 |  |  | $ | 0.057 |  |  | $ | 0.081  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net increase in net assets
resulting from operations |                                      | $ | 0.221   |  |         | $ | 0.229   |  |       | $ | 0.207 |  |  | $ | 0.294 |  |  | $ | 0.951  | 

|                                                     |                                      |   |         |   |         |   |         |  |       |   |       |  |  |   |        |   |  |   |        | 
|---------------------------------------------------- | ------------------------------------ | - | ------- | - | ------- | - | ------- |  | ----- | - | ----- |  |  | - | ------ | - |  | - | ------ | 
|                                                     | FOR THE YEAR ENDED DECEMBER 31, 1999
|                                                     |                                     
|                                                     | First                                |   | Second  |   | Third   |   | Fourth 
|                                                     | Quarter                              |   | Quarter |   | Quarter |   | Quarter |  | Total
|                                                     |                                      |   |         |   |         |   |         |  |      
|Operating income                                     |                                      | $ | 5,604   |   |         | $ | 5,497   |  |       | $ | 5,677 |  |  | $ | 5,849  |   |  | $ | 22,627 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net operating income                                 |                                      | $ | 2,903   |   |         | $ | 2,775   |  |       | $ | 2,758 |  |  | $ | 3,051  |   |  | $ | 11,487 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net gain (loss) on investments                       |                                      | $ | (158    | ) |         | $ | 2,240   |  |       | $ | 192   |  |  | $ | (341   | ) |  | $ | 1,933  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net increase in net assets
resulting from operations |                                      | $ | 2,745   |   |         | $ | 5,015   |  |       | $ | 2,950 |  |  | $ | 2,710  |   |  | $ | 13,420 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                     
|                                                     | PER SHARE                           
|                                                     |                                     
|                                                    
|                                                    
|                                                    
|                                                    
|Operating income                                     |                                      | $ | 0.474   |   |         | $ | 0.465   |  |       | $ | 0.480 |  |  | $ | 0.494  |   |  | $ | 1.913  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net operating income                                 |                                      | $ | 0.245   |   |         | $ | 0.235   |  |       | $ | 0.233 |  |  | $ | 0.258  |   |  | $ | 0.971  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net gain (loss) on investments                       |                                      | $ | (0.013  | ) |         | $ | 0.189   |  |       | $ | 0.016 |  |  | $ | (0.029 | ) |  | $ | 0.163  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net increase in net assets
resulting from operations |                                      | $ | 0.232   |   |         | $ | 0.424   |  |       | $ | 0.249 |  |  | $ | 0.229  |   |  | $ | 1.134  | 

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Report of Independent Accountants

To the Shareholders and Board of Directors



PMC Capital, Inc.:

In our opinion, the accompanying consolidated balance sheets as of December 31,
2000 and 1999, including the schedule of investments as of December 31, 2000 and
the related consolidated statements of income, shareholders equity and cash
flows for each of the three years in the period ended December 31, 2000 and the
financial highlights for each of the five years in the period ended December 31,
2000 present fairly, in all material respects, the financial position of PMC
Capital, Inc. and its subsidiaries at December 31, 2000 and 1999 and the results
of their operations and their cash flows and the financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities as of
December 31, 2000 and 1999, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

March 2, 2001, except for note 18, as to



      which the date is March 14, 2001

Dallas, Texas

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---




---

Our financial highlights included below should be read in conjunction
with the consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-K. The financial highlights below provide information
about our financial history. It uses our fiscal year (which ends December 31)
and expresses the per share operating performance in terms of a single share
outstanding throughout each fiscal period. The information is derived from the
audited consolidated financial statements.

|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |       |        |      |      | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------ | -------------------------------- | ------ | ------------------------ | ---- | ---- | ------ | ---- | ---- | ---- | ------ | ---- | ---- | ----- | ------ | ---- | ---- | ----- | ------ | ---- | ---- | 
|                                     |                                                                                                            |                                                               |                                                  |                                  |        | Years Ended December 31,
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                         
|                                     |                                                                                                            |                                                               |                                                  |                                  |        | 2000                     |      | 1999 |        | 1998 |      | 1997 |        | 1996
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |     
|Per share operating performance (1):
|                                    
|                                    
|                                    
|                                    
|                                     | Net asset value, beginning of period                                                                       |                                                               | $                                                | 6.20                             |        |                          | $    | 6.10 |        |      | $    | 6.03 |        |      | $    | 5.64  |        |      | $    | 5.44  |       
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     |                                                                                                            | Net operating income                                          |                                                  |                                  | 0.87   |                          |      |      | 0.98   |      |      |      | 1.12   |      |      |       | 1.21   |      |      |       | 1.21   |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                            | Net gains or losses on securities
realized and unrealized (2) |                                                  |                                  | 0.08   |                          |      |      | 0.16   |      |      |      | 0.20   |      |      |       | 0.47   |      |      |       | 0.17   |     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     |                                                                                                            |                                                               |                                                  | Total from investment operations |        |                          | 0.95 |      |        |      | 1.14 |      |        |      | 1.32 |       |        |      | 1.68 |       |        |      | 1.38 | 
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Less distributions:                                                                                       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                            |                                                               | Preferred shareholder of consolidated
subsidiary |                                  |        | 0.02                     |      |      |        | 0.02 |      |      |        | 0.02 |      |       |        | 0.02 |      |       |        | 0.02 |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                            |                                                               | Common shareholders                              |                                  |        | 1.00                     |      |      |        | 1.02 |      |      |        | 1.23 |      |       |        | 1.27 |      |       |        | 1.16 |     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     |                                                                                                            |                                                               |                                                  | Total distributions              |        |                          | 1.02 |      |        |      | 1.04 |      |        |      | 1.25 |       |        |      | 1.29 |       |        |      | 1.18 | 
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Net asset value, end of period                                                                             |                                                               | $                                                | 6.13                             |        |                          | $    | 6.20 |        |      | $    | 6.10 |        |      | $    | 6.03  |        |      | $    | 5.64  |       
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Per share market value, end of period                                                                      |                                                               | $                                                | 8.00                             |        |                          | $    | 8.25 |        |      | $    | 8.56 |        |      | $    | 14.56 |        |      | $    | 14.00 |       
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Total investment return                                                                                    |                                                               |                                                  | 9                                | %      |                          |      | 9    | %      |      |      | (33  | %)     |      |      | 13    | %      |      |      | 20    | %     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|Ratios and supplemental data:       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                            | Net assets, end of period (in thousands)                      |                                                  | $                                | 72,667 |                          |      | $    | 73,314 |      |      | $    | 72,151 |      |      | $     | 70,166 |      |      | $     | 62,903 |     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Ratio of expenses to average net assets                                                                    |                                                               |                                                  | 15                               | %      |                          |      | 15   | %      |      |      | 16   | %      |      |      | 16    | %      |      |      | 17    | %     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Ratio of operating income to average net
assets                                                            |                                                               |                                                  | 14                               | %      |                          |      | 16   | %      |      |      | 19   | %      |      |      | 21    | %      |      |      | 22    | %     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Ratio of net operating income and realized
and unrealized gain (loss) on investments
to average net assets |                                                               |                                                  | 15                               | %      |                          |      | 18   | %      |      |      | 20   | %      |      |      | 24    | %      |      |      | 22    | %     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      
|                                     | Portfolio turnover (3)                                                                                     |                                                               |                                                  | 44                               | %      |                          |      | 87   | %      |      |      | 58   | %      |      |      | 20    | %      |      |      | 16    | %     
|                                     |                                                                                                            |                                                               |                                                  |                                  |        |                          |      |      |        |      |      |      |        |      |      |       |        |      |      |      

Footnotes:

|(1) |  | The per share changes during the year are based on the basic weighted
average number of shares outstanding of the Company during   the year
presented.                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The per share net gains or losses on securities (realized and
unrealized) includes the effect of stock issuances and other changes in
per   share amounts during the year presented.
|   
|   
|   
|   
|(3) |  | Included in the computation of the portfolio turnover rate are the
sales of loans through the secondary market or private placement.                                                

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PMC CAPITAL, INC. AND SUBSIDIARIES






|                                           |                                                                                                                                                                   |   |         |         |              |   |         |         |  |  | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------- | ------------ | - | ------- | ------- |  |  | 
|                                           |                                                                                                                                                                   |   |         |         | December 31,
|                                           |                                                                                                                                                                   |   |         |         |             
|                                           |                                                                                                                                                                   |   |         |         | 2000         |   | 1999   
|                                           |                                                                                                                                                                   |   |         |         |              |   |        
|ASSETS                                    
|                                          
|                                          
|                                          
|                                          
|Investments at value:                     
|                                          
|                                          
|                                          
|                                          
|                                           | Loans receivable, net                                                                                                                                             |   | $       | 100,353 |              |   | $       | 106,325 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Retained interests in transferred assets                                                                                                                          |   |         | 32,341  |              |   |         | 28,408  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Cash equivalents                                                                                                                                                  |   |         | 21,655  |              |   |         | 22,980  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Mortgage-backed security of affiliate                                                                                                                             |   |         | 1,841   |              |   |         | 2,007   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Restricted investments                                                                                                                                            |   |         | 177     |              |   |         | 969     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Investment in unconsolidated subsidiaries                                                                                                                         |   |         | 148     |              |   |         | 162     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Real property owned                                                                                                                                               |   |         |        |              |   |         | 65      | 
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Total investments at value                 |                                                                                                                                                                   |   | 156,515 |         |              |   | 160,916 |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Other assets:                             
|                                          
|                                          
|                                          
|                                          
|                                           | Due from unconsolidated subsidiaries                                                                                                                              |   |         | 2,278   |              |   |         | 2,277   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred charges, deposits and other assets                                                                                                                       |   |         | 938     |              |   |         | 932     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Receivable for loans sold                                                                                                                                         |   |         | 750     |              |   |         | 113     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued interest receivable                                                                                                                                       |   |         | 579     |              |   |         | 534     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Cash                                                                                                                                                              |   |         | 254     |              |   |         | 213     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Property and equipment, net                                                                                                                                       |   |         | 164     |              |   |         | 206     | 
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Total other assets                         |                                                                                                                                                                   |   | 4,963   |         |              |   | 4,275   |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Total assets                               |                                                                                                                                                                   | $ | 161,478 |         |              | $ | 165,191 |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY      
|                                          
|                                          
|                                          
|                                          
|Liabilities:                              
|                                          
|                                          
|                                          
|                                          
|                                           | Notes and debentures payable                                                                                                                                      |   | $       | 72,977  |              |   | $       | 73,973  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Dividends payable                                                                                                                                                 |   |         | 3,026   |              |   |         | 3,198   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Borrower advances                                                                                                                                                 |   |         | 1,549   |              |   |         | 2,415   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued interest payable                                                                                                                                          |   |         | 1,284   |              |   |         | 1,249   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                                                                                  |   |         | 1,088   |              |   |         | 1,940   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Due to unconsolidated subsidiaries                                                                                                                                |   |         | 667     |              |   |         | 628     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Other liabilities                                                                                                                                                 |   |         | 1,220   |              |   |         | 1,474   | 
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Total liabilities                          |                                                                                                                                                                   |   | 81,811  |         |              |   | 84,877  |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Commitments and contingencies             
|                                          
|                                          
|                                          
|                                          
|Cumulative preferred stock of subsidiary   |                                                                                                                                                                   |   | 7,000   |         |              |   | 7,000   |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Shareholders equity:                     
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, authorized
30,000,000 shares of $.01 par value,
11,853,516 and
11,829,116 shares issued and outstanding
at December 31, 2000 and 1999, respectively |   |         | 119     |              |   |         | 118     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                                                                                        |   |         | 71,508  |              |   |         | 71,312  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Undistributed net operating income                                                                                                                                |   |         | 238     |              |   |         | 1,484   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Net unrealized appreciation on investments                                                                                                                        |   |         | 802     |              |   |         | 400     | 
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|                                           |                                                                                                                                                                   |   | 72,667  |         |              |   | 73,314  |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Total liabilities and shareholders equity |                                                                                                                                                                   | $ | 161,478 |         |              | $ | 165,191 |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        
|Net asset value per common share           |                                                                                                                                                                   | $ | 6.13    |         |              | $ | 6.20    |        
|                                           |                                                                                                                                                                   |   |         |         |              |   |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-6



---



##### Table of Contents



PMC CAPITAL INC. AND SUBSIDIARIES






|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |      |       |      |   |  |  |  | 
|------------------------------------- | ------------------------------------------------------------------------------- | -------------------------- | --------------------------- | ----- | -------------- | -- | ------------------ | ----- | ------- | ------ |  | ----- | ----- | ---- | - | ----- | ------- | ------ |  | --- | ----- | ---- | ------ | -- | --- | -- | - | ------ | ------- | ------ |  | ---- | ----- | ---- | - |  |  |  | 
|                                      |                                                                                 |                            |                             |       | Retained Loans |    | Serviced Loans (2)
|                                      |                                                                                 |                            |                             |       |                |    |                   
|                                      |                                                                                 |                            |                             |       | Number         |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      | Number
|                                      |                                                                                 |                            |                             |       | of             |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      | of    
|Category / Issuer (1)                 |                                                                                 | Loans                      |                             | Value |                | %  |                    | Cost  |         | %      |  | Loans |       | Cost |   | %    
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |      
|Loans to small business concerns (3):
|                                     
|                                     
|                                     
|                                     
|                                      | First Western SBLC, Inc. and Subsidiaries                                      
|                                     
|                                     
|                                     
|                                     
|                                      | (Small business lending company loans)                                         
|                                     
|                                     
|                                     
|                                     
|                                      | Hotels and motels                                                               |                            |                             | 58    |                |    | $                  | 9,122 |         |        |  | 9.1   | %     |      | $ | 9,503 |         |        |  | 9.4 | %     |      |        | 80 |     |    | $ | 53,471 |         |        |  | 17.5 | %    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Restaurants                 |       |                | 27 |                    |       |         | 2,646  |  |       |       | 2.7  | % |       |         | 2,781  |  |     |       | 2.8  | %      |    |     | 43 |   |        |         | 10,357 |  |      |       | 3.4  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Retail, other               |       |                | 26 |                    |       |         | 1,326  |  |       |       | 1.3  | % |       |         | 1,389  |  |     |       | 1.4  | %      |    |     | 42 |   |        |         | 6,485  |  |      |       | 2.1  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Gasoline / service stations |       |                | 12 |                    |       |         | 971    |  |       |       | 1.0  | % |       |         | 1,054  |  |     |       | 1.0  | %      |    |     | 15 |   |        |         | 5,872  |  |      |       | 1.9  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Services                    |       |                | 35 |                    |       |         | 968    |  |       |       | 1.0  | % |       |         | 1,097  |  |     |       | 1.1  | %      |    |     | 53 |   |        |         | 8,766  |  |      |       | 2.8  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Car washes                  |       |                | 3  |                    |       |         | 535    |  |       |       | 0.5  | % |       |         | 630    |  |     |       | 0.6  | %      |    |     | 3  |   |        |         | 2,522  |  |      |       | 0.8  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Food and grocery stores     |       |                | 2  |                    |       |         | 144    |  |       |       | 0.1  | % |       |         | 151    |  |     |       | 0.2  | %      |    |     | 2  |   |        |         | 903    |  |      |       | 0.3  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Laundromats                 |       |                | 6  |                    |       |         | 214    |  |       |       | 0.2  | % |       |         | 250    |  |     |       | 0.2  | %      |    |     | 7  |   |        |         | 1,338  |  |      |       | 0.4  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Wholesale                   |       |                | 5  |                    |       |         | 121    |  |       |       | 0.1  | % |       |         | 126    |  |     |       | 0.1  | %      |    |     | 8  |   |        |         | 1,259  |  |      |       | 0.4  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Manufacturing               |       |                | 8  |                    |       |         | 44     |  |       |       | 0.0  | % |       |         | 46     |  |     |       | 0.0  | %      |    |     | 8  |   |        |         | 1,012  |  |      |       | 0.3  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Other                       |       |                | 2  |                    |       |         | 171    |  |       |       | 0.2  | % |       |         | 178    |  |     |       | 0.2  | %      |    |     | 2  |   |        |         | 710    |  |      |       | 0.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Health care                 |       |                | 5  |                    |       |         | 17     |  |       |       | 0.0  | % |       |         | 18     |  |     |       | 0.0  | %      |    |     | 7  |   |        |         | 321    |  |      |       | 0.1  | %
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      |                                                                                 | Total                      |                             |       | 189            |    |                    |       | 16,279  |        |  |       | 16.2  | %    |   |       | 17,223  |        |  |     | 17.0  | %    |        |    | 270 |    |   |        | 93,016  |        |  |      | 30.2  | %   
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      | Western Financial Capital Corporation                                          
|                                     
|                                     
|                                     
|                                     
|                                      | (Small business investment company loans)                                      
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Hotels and motels           |       |                | 18 |                    |       |         | 16,043 |  |       |       | 16.0 | % |       |         | 16,043 |  |     |       | 15.8 | %      |    |     | 33 |   |        |         | 28,463 |  |      |       | 9.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Other notes receivable      |       |                | 4  |                    |       |         | 148    |  |       |       | 0.1  | % |       |         | 148    |  |     |       | 0.1  | %      |    |     | 5  |   |        |         | 533    |  |      |       | 0.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Health care                 |       |                | 5  |                    |       |         | 149    |  |       |       | 0.1  | % |       |         | 182    |  |     |       | 0.2  | %      |    |     | 8  |   |        |         | 626    |  |      |       | 0.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Services                    |       |                | 1  |                    |       |         | 383    |  |       |       | 0.4  | % |       |         | 383    |  |     |       | 0.4  | %      |    |     | 9  |   |        |         | 3,455  |  |      |       | 1.1  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Retail, other               |       |                | 1  |                    |       |         | 30     |  |       |       | 0.0  | % |       |         | 30     |  |     |       | 0.0  | %      |    |     | 3  |   |        |         | 2,203  |  |      |       | 0.7  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Wholesale                   |       |                | 1  |                    |       |         | 250    |  |       |       | 0.3  | % |       |         | 250    |  |     |       | 0.2  | %      |    |     | 1  |   |        |         | 250    |  |      |       | 0.1  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Gasoline / service stations |       |                |   |                    |       |         |       |  |       |       | 0.0  | % |       |         |       |  |     |       | 0.0  | %      |    |     | 4  |   |        |         | 1,481  |  |      |       | 0.5  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Restaurants                 |       |                |   |                    |       |         |       |  |       |       | 0.0  | % |       |         |       |  |     |       | 0.0  | %      |    |     | 1  |   |        |         | 1,049  |  |      |       | 0.3  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Manufacturing               |       |                |   |                    |       |         |       |  |       |       | 0.0  | % |       |         |       |  |     |       | 0.0  | %      |    |     | 1  |   |        |         | 364    |  |      |       | 0.1  | %
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      |                                                                                 | Total                      |                             |       | 30             |    |                    |       | 17,003  |        |  |       | 16.9  | %    |   |       | 17,036  |        |  |     | 16.7  | %    |        |    | 65  |    |   |        | 38,424  |        |  |      | 12.4  | %   
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      | PMC Investment Corporation(Specialized small business investment
company loans)
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Hotels and motels           |       |                | 41 |                    |       |         | 40,859 |  |       |       | 40.7 | % |       |         | 41,003 |  |     |       | 40.4 | %      |    |     | 80 |   |        |         | 71,822 |  |      |       | 23.3 | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Health care                 |       |                | 2  |                    |       |         | 138    |  |       |       | 0.2  | % |       |         | 209    |  |     |       | 0.2  | %      |    |     | 2  |   |        |         | 209    |  |      |       | 0.1  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Services                    |       |                | 1  |                    |       |         | 48     |  |       |       | 0.0  | % |       |         | 48     |  |     |       | 0.0  | %      |    |     | 1  |   |        |         | 48     |  |      |       | 0.0  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Retail, other               |       |                | 1  |                    |       |         | 1,722  |  |       |       | 1.7  | % |       |         | 1,722  |  |     |       | 1.7  | %      |    |     | 1  |   |        |         | 1,722  |  |      |       | 0.6  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Other notes receivable      |       |                | 1  |                    |       |         | 2      |  |       |       | 0.0  | % |       |         | 2      |  |     |       | 0.0  | %      |    |     | 1  |   |        |         | 2      |  |      |       | 0.0  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Gasoline / service stations |       |                | 2  |                    |       |         | 650    |  |       |       | 0.7  | % |       |         | 650    |  |     |       | 0.7  | %      |    |     | 7  |   |        |         | 3,249  |  |      |       | 1.1  | %
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      |                                                                                 | Total                      |                             |       | 48             |    |                    |       | 43,419  |        |  |       | 43.3  | %    |   |       | 43,634  |        |  |     | 43.0  | %    |        |    | 92  |    |   |        | 77,052  |        |  |      | 25.1  | %   
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      | PMC Capital, Inc.                                                              
|                                     
|                                     
|                                     
|                                     
|                                      | (Commercial loans)                                                             
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Hotels and motels           |       |                | 15 |                    |       |         | 19,495 |  |       |       | 19.4 | % |       |         | 19,507 |  |     |       | 19.2 | %      |    |     | 76 |   |        |         | 85,977 |  |      |       | 27.9 | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Apartment complex           |       |                | 1  |                    |       |         | 969    |  |       |       | 1.0  | % |       |         | 969    |  |     |       | 1.0  | %      |    |     | 4  |   |        |         | 3,282  |  |      |       | 1.1  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Services                    |       |                |   |                    |       |         |       |  |       |       | 0.0  | % |       |         |       |  |     |       | 0.0  | %      |    |     | 4  |   |        |         | 3,554  |  |      |       | 1.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Gasoline / service stations |       |                | 3  |                    |       |         | 826    |  |       |       | 0.8  | % |       |         | 826    |  |     |       | 0.8  | %      |    |     | 3  |   |        |         | 826    |  |      |       | 0.3  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Restaurants                 |       |                | 1  |                    |       |         | 418    |  |       |       | 0.4  | % |       |         | 432    |  |     |       | 0.4  | %      |    |     | 4  |   |        |         | 2,419  |  |      |       | 0.8  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Health care                 |       |                | 1  |                    |       |         | 651    |  |       |       | 0.7  | % |       |         | 651    |  |     |       | 0.6  | %      |    |     | 1  |   |        |         | 651    |  |      |       | 0.2  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Commercial real estate      |       |                | 3  |                    |       |         | 1,293  |  |       |       | 1.3  | % |       |         | 1,293  |  |     |       | 1.3  | %      |    |     | 4  |   |        |         | 1,543  |  |      |       | 0.5  | %
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                 |                            | Manufacturing               |       |                |   |                    |       |         |       |  |       |       | 0.0  | % |       |         |       |  |     |       | 0.0  | %      |    |     | 1  |   |        |         | 1,006  |  |      |       | 0.3  | %
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      |                                                                                 | Total                      |                             |       | 24             |    |                    |       | 23,652  |        |  |       | 23.6  | %    |   |       | 23,678  |        |  |     | 23.3  | %    |        |    | 97  |    |   |        | 99,258  |        |  |      | 32.3  | %   
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     
|                                      |                                                                                 | Total loans receivable (4) |                             |       | 291            |    |                    | $     | 100,353 |        |  |       | 100.0 | %    |   | $     | 101,571 |        |  |     | 100.0 | %    |        |    | 524 |    |   | $      | 307,750 |        |  |      | 100.0 | %   
|                                      |                                                                                 |                            |                             |       |                |    |                    |       |         |        |  |       |       |      |   |       |         |        |  |     |       |      |        |    |     |    |   |        |         |        |  |     

(Continued on next page )

F-7



---



##### Table of Contents



PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000( Continued dollars in thousands, except footnotes )

|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |      |     |  
|------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------------------------- | ------- | ------ | ------ | ---- | ----- | ---- | --- | - | ------- | ------ | ----- |  | ----- | ---- | --- | -
|Category / Issuer (1)                                   |                                                              | Value                                                                      |         | %      |        | Cost |       | %   
|                                                        |                                                              |                                                                            |         |        |        |      |       |     
|Total loans receivable (from prior page)                |                                                              | $                                                                          | 100,353 |        |        |      | 64.1  | %    |     | $ | 101,571 |        |       |  | 65.0  | %   
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Money market and fund deposit accounts (5):            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Bank One money market saving accounts                                      |         |        | 2,662  |      |       |      | 1.7 | % |         |        | 2,662 |  |       |      | 1.7 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Dreyfus, Cash Management Plus money market fund                            |         |        | 4,515  |      |       |      | 2.9 | % |         |        | 4,515 |  |       |      | 2.9 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | SunTrust, overnight repo account                                           |         |        | 840    |      |       |      | 0.5 | % |         |        | 840   |  |       |      | 0.5 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Texas Capital Bank, money market savings accounts                          |         |        | 106    |      |       |      | 0.1 | % |         |        | 106   |  |       |      | 0.1 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Goldman Sachs, Prime Obligation money market fund                          |         |        | 6,014  |      |       |      | 3.8 | % |         |        | 6,014 |  |       |      | 3.9 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Goldman Sachs, money market fund                                           |         |        | 7,518  |      |       |      | 4.8 | % |         |        | 7,518 |  |       |      | 4.8 | %
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                        | Total money market and fund deposit accounts                 |                                                                            |         | 21,655 |        |      |       | 13.8 | %   |   |         | 21,655 |       |  |       | 13.9 | %  
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Investment in retained interests in transferred assets:
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to PMC Capital L.P. 1999-1 and affiliate  |         |        | 10,832 |      |       |      | 6.9 | % |         |        | 9,381 |  |       |      | 6.0 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to PMC Limited Partnership and affiliates |         |        | 6,568  |      |       |      | 4.2 | % |         |        | 6,568 |  |       |      | 4.2 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to PMC Capital L.P. 1998-1 and affiliate  |         |        | 5,249  |      |       |      | 3.4 | % |         |        | 5,499 |  |       |      | 3.5 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to PMC Joint Venture 2000 and affiliate   |         |        | 5,688  |      |       |      | 3.6 | % |         |        | 5,688 |  |       |      | 3.6 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to First Western 1994                     |         |        | 516    |      |       |      | 0.3 | % |         |        | 550   |  |       |      | 0.4 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of loans sold to First Western 1997                     |         |        | 1,150  |      |       |      | 0.8 | % |         |        | 1,080 |  |       |      | 0.7 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Retained interests of secondary market loan sales                          |         |        | 2,338  |      |       |      | 1.5 | % |         |        | 2,196 |  |       |      | 1.4 | %
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                        | Total investment in retained interests in transferred assets |                                                                            |         | 32,341 |        |      |       | 20.7 | %   |   |         | 30,962 |       |  |       | 19.8 | %  
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Other investments:                                     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Investment in PMC Funding Corp. and subsidiary                             |         |        | 122    |      |       |      | 0.1 | % |         |        | 122   |  |       |      | 0.1 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Investment in PMC Advisers, Ltd. and subsidiary                            |         |        | 26     |      |       |      | 0.0 | % |         |        | 26    |  |       |      | 0.0 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Investment in Class B certificate of PMC Capital L.P. 1998-1               |         |        | 1,841  |      |       |      | 1.2 | % |         |        | 1,759 |  |       |      | 1.1 | %
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Restricted investments                                                     |         |        | 177    |      |       |      | 0.1 | % |         |        | 177   |  |       |      | 0.1 | %
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                        | Total other investments                                      |                                                                            |         | 2,166  |        |      |       | 1.4  | %   |   |         | 2,084  |       |  |       | 1.3  | %  
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Total investments (6)                                   |                                                              | $                                                                          | 156,515 |        |        |      | 100.0 | %    |     | $ | 156,272 |        |       |  | 100.0 | %   
|                                                        |                                                              |                                                                            |         |        |        |      |       |      |     |   |         |        |       |  |       |     



|(1) |  | Names have been omitted as disclosure to the public may be detrimental to the small business.                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Balances include retained loans, loans sold into the secondary
market ( $65.9 million ), the loans contributed to the
Partnerships ( $130.4 million ) and the unguaranteed portion of
First Western loans sold and serviced ( $9.9 million ). The
balance does not include approximately $122 million of loan
portfolio serviced on behalf of PMC Commercial Trust.
|   
|   
|   
|   
|(3) |  | Interest rates on loans receivable range from 8.0% to 14.5%.                                                                                                                                                                                                                                                                                                       
|   
|   
|   
|   
|(4) |  | Balances are at face value of loans, less discounts aggregating $559,000 and reserves of $659,000.                                                                                                                                                                                                                                                                 
|   
|   
|   
|   
|(5) |  | Interest or dividend rates on money market and fund deposit accounts range from 4% to 6.5%.                                                                                                                                                                                                                                                                        
|   
|   
|   
|   
|(6) |  | The aggregate cost of investments for Federal income tax purposes is approximately $151 million (unaudited).                                                                                                                                                                                                                                                       

The accompanying notes are an integral part of these consolidated financial statements.

F-8



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |        |      |   |  |  |  | 
|--------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------------------- | ------ | ------------------------ | --- | ---- | ------ | ------ | ------ | - | ------ | ------ | ---- | - |  |  |  | 
|                                                                            |                                                      |                                                                 |        | Years Ended December 31,
|                                                                            |                                                      |                                                                 |        |                         
|                                                                            |                                                      |                                                                 |        | 2000                     |     | 1999 |        | 1998  
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |       
|Investment income:                                                         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest                                             |                                                                 | $      | 13,540                   |     |      | $      | 14,195 |        |   | $      | 16,507 |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Income from retained interests in transferred assets |                                                                 |        | 4,020                    |     |      |        | 3,467  |        |   |        | 3,261  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Premium income                                       |                                                                 |        | 573                      |     |      |        | 1,090  |        |   |        | 776    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Other investment income, net                         |                                                                 |        | 823                      |     |      |        | 843    |        |   |        | 807    |     
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Total investment income                                                     |                                                      |                                                                 | 18,956 |                          |     |      | 19,595 |        |        |   | 21,351 |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other income, net                                                           |                                                      |                                                                 | 2,148  |                          |     |      | 2,320  |        |        |   | 2,893  |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Equity in income of unconsolidated subsidiaries, net                        |                                                      |                                                                 | 480    |                          |     |      | 712    |        |        |   | 70     |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Total income                                                                |                                                      |                                                                 | 21,584 |                          |     |      | 22,627 |        |        |   | 24,314 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Expenses:                                                                  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest                                             |                                                                 |        | 5,383                    |     |      |        | 5,313  |        |   |        | 5,467  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Salaries and related benefits                        |                                                                 |        | 4,182                    |     |      |        | 4,049  |        |   |        | 3,965  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | General and administrative                           |                                                                 |        | 750                      |     |      |        | 860    |        |   |        | 821    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Rent                                                 |                                                                 |        | 315                      |     |      |        | 286    |        |   |        | 244    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Legal and accounting                                 |                                                                 |        | 260                      |     |      |        | 235    |        |   |        | 182    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Profit sharing plan                                  |                                                                 |        | 247                      |     |      |        | 243    |        |   |        | 243    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Small Business Administration fees                   |                                                                 |        | 86                       |     |      |        | 86     |        |   |        | 106    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Directors and shareholders expense                   |                                                                 |        | 57                       |     |      |        | 68     |        |   |        | 63     |     
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Total expenses                                                              |                                                      |                                                                 | 11,280 |                          |     |      | 11,140 |        |        |   | 11,091 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Net operating income                                                        |                                                      |                                                                 | 10,304 |                          |     |      | 11,487 |        |        |   | 13,223 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Realized and unrealized gain (loss) on investments:                        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                      | Investments written-off                                         |        |                          | (17 | )    |        |        | (1,805 | ) |        |        | (219 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                      | Sale of assets                                                  |        |                          | 564 |      |        |        | 2,564  |   |        |        | 925  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                      | Change in unrealized appreciation
(depreciation) on investments |        |                          | 402 |      |        |        | 1,174  |   |        |        | 20   |  
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Total realized and unrealized gain (loss) on investments                    |                                                      |                                                                 | 949    |                          |     |      | 1,933  |        |        |   | 726    |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Net operating income and realized and unrealized
gain (loss) on investments |                                                      | $                                                               | 11,253 |                          |     | $    | 13,420 |        |        | $ | 13,949 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Preferred dividends                                                         |                                                      | $                                                               | 251    |                          |     | $    | 250    |        |        | $ | 250    |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Basic weighted average common shares outstanding                            |                                                      |                                                                 | 11,841 |                          |     |      | 11,829 |        |        |   | 11,800 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Diluted weighted average common shares outstanding                          |                                                      |                                                                 | 11,845 |                          |     |      | 11,831 |        |        |   | 11,800 |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       
|Basic and diluted earnings per common share                                 |                                                      | $                                                               | 0.93   |                          |     | $    | 1.11   |        |        | $ | 1.16   |       
|                                                                            |                                                      |                                                                 |        |                          |     |      |        |        |        |   |        |       

The accompanying notes are an integral part of these consolidated financial statements.

F-9



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   |            |   |  |   |        |         |  
|-------------------------------------------------------------------------------------------------- | --------------------------------- | - | ------ | - | ------- | - | ---------- | - | ----------- | - | -------------- | ------- | ------------ | - | ---------- | - |  | - | ------ | ------- | -
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   | Net       
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   | Unrealized
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   | Undistributed  |         | Appreciation
|                                                                                                   |                                   |   |        |   |         |   | Additional |   | Net         |   | (Depreciation)
|                                                                                                   |                                   |   | Common |   | Paid-in |   | Operating  |   | on         
|                                                                                                   |                                   |   | Stock  |   | Capital |   | Income     |   | Investments |   | Total         
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |               
|Balance, January 1, 1998                                                                           |                                   | $ | 116    |   |         | $ | 68,555     |   |             | $ | 2,289          |         |              | $ | (794       | ) |  | $ | 70,166 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuances of common stock pursuant
to dividend reinvestment and cash
purchase plan, 198,329 shares |                                   |   | 2      |   |         |   | 2,757      |   |             |   |               |         |              |   |           |   |  |   | 2,759  |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Total realized and unrealized
gain (loss) on investments                                           |                                   |   |       |   |         |   |           |   |             |   | 13,929         |         |              |   | 20         |   |  |   | 13,949 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Dividends:                                                                                        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Preferred                         |   |        |  |         |   |            |  |             |   |                | (250    | )            |   |            |  |  |   |        | (250    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Common ( $1.23 per common share ) |   |        |  |         |   |            |  |             |   |                | (14,473 | )            |   |            |  |  |   |        | (14,473 | )
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   |            |   |  |   |        |        
|Balance, December 31, 1998                                                                         |                                   |   | 118    |   |         |   | 71,312     |   |             |   | 1,495          |         |              |   | (774       | ) |  |   | 72,151 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Total realized and unrealized
gain (loss) on investments                                           |                                   |   |       |   |         |   |           |   |             |   | 12,246         |         |              |   | 1,174      |   |  |   | 13,420 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Dividends:                                                                                        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Preferred                         |   |        |  |         |   |            |  |             |   |                | (250    | )            |   |            |  |  |   |        | (250    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Common ( $1.02 per common share ) |   |        |  |         |   |            |  |             |   |                | (12,007 | )            |   |            |  |  |   |        | (12,007 | )
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   |            |   |  |   |        |        
|Balance, December 31, 1999                                                                         |                                   |   | 118    |   |         |   | 71,312     |   |             |   | 1,484          |         |              |   | 400        |   |  |   | 73,314 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Total realized and unrealized
gain (loss) on investments                                           |                                   |   |       |   |         |   |           |   |             |   | 10,851         |         |              |   | 402        |   |  |   | 11,253 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuances of common stock pursuant
to stock option plan, 24,400 shares                             |                                   |   | 1      |   |         |   | 196        |   |             |   |               |         |              |   |           |   |  |   | 197    |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Dividends:                                                                                        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Preferred                         |   |        |  |         |   |            |  |             |   |                | (251    | )            |   |            |  |  |   |        | (251    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Common ( $1.00 per common share ) |   |        |  |         |   |            |  |             |   |                | (11,846 | )            |   |            |  |  |   |        | (11,846 | )
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   |            |   |  |   |        |        
|Balance, December 31, 2000                                                                         |                                   | $ | 119    |   |         | $ | 71,508     |   |             | $ | 238            |         |              | $ | 802        |   |  | $ | 72,667 |        
|                                                                                                   |                                   |   |        |   |         |   |            |   |             |   |                |         |              |   |            |   |  |   |        |        

The accompanying notes are an integral part of these consolidated financial statements.

F-10



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES






|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |         |   |        |   |  |  |  | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------- | ------- | ------------------------ | ------ | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | - |  |  |  | 
|                                                     |                                                                                                                                                    |   |                                                                              |         | Years Ended December 31,
|                                                     |                                                                                                                                                    |   |                                                                              |         |                         
|                                                     |                                                                                                                                                    |   |                                                                              |         | 2000                     |        | 1999    |         | 1998
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |     
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net operating income and realized and unrealized gain (loss) on investments                                                                        |   | $                                                                            | 11,253  |                          |        | $       | 13,420  |      |         | $       | 13,949  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net operating income and realized and unrealized gain
(loss) on investments to net cash provided by operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Loans funded, held for sale                                                  |         |                          | (8,606 | )       |         |      | (19,308 | )       |         |   | (7,407 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Proceeds from sale of guaranteed loans                                       |         |                          | 9,584  |         |         |      | 19,152  |         |         |   | 9,978  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Change in unrealized depreciation on investments and investments written-off |         |                          | (385   | )       |         |      | 631     |         |         |   | 199    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Unrealized premium income, net                                               |         |                          | (255   | )       |         |      | (664    | )       |         |   | (7     | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Depreciation and amortization                                                |         |                          | 177    |         |         |      | 184     |         |         |   | 427    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Accretion of loan discount and deferred fees                                 |         |                          | (288   | )       |         |      | (780    | )       |         |   | (1,163 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Deferred fees collected                                                      |         |                          | 47     |         |         |      | 163     |         |         |   | 91     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Gain on sale of assets, net                                                  |         |                          | (564   | )       |         |      | (2,564  | )       |         |   | (928   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Equity in income of unconsolidated subsidiaries, net                         |         |                          | (480   | )       |         |      | (712    | )       |         |   | (70    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Net change in operating assets and liabilities:                             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Accrued interest receivable                                                  |         |                          | (45    | )       |         |      | (125    | )       |         |   | 29     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Other assets                                                                 |         |                          | 62     |         |         |      | 99      |         |         |   | 338    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Accrued interest payable                                                     |         |                          | 35     |         |         |      | (15     | )       |         |   | (52    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Borrower advances                                                            |         |                          | (866   | )       |         |      | 817     |         |         |   | (81    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |   | Other liabilities                                                            |         |                          | (1,033 | )       |         |      | (143    | )       |         |   | (1,610 | )
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Net cash provided by operating activities            |                                                                                                                                                    |   | 8,636                                                                        |         |                          |        | 10,155  |         |      |         | 13,693  |        
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Loans funded                                                                                                                                       |   |                                                                              | (35,552 | )                        |        |         | (64,956 | )    |         |         | (59,043 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal collected and other adjustments                                                                                                          |   |                                                                              | 11,233  |                          |        |         | 15,431  |      |         |         | 24,661  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from retained interests in transferred assets                                                                                             |   |                                                                              | 3,000   |                          |        |         | 3,626   |      |         |         | 1,928   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from (purchase of) mortgage-backed security of affiliate                                                                                  |   |                                                                              | 248     |                          |        |         | 161     |      |         |         | (2,168  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of assets                                                                                                                       |   |                                                                              | 65      |                          |        |         | 71      |      |         |         | 301     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Distributions from unconsolidated subsidiaries                                                                                                     |   |                                                                              | 494     |                          |        |         | 750     |      |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Release of (investment in) restricted cash                                                                                                         |   |                                                                              | 792     |                          |        |         | (366    | )    |         |         | 508     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of furniture and fixtures and other assets                                                                                                |   |                                                                              | (15     | )                        |        |         | (39     | )    |         |         | (146    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment in retained interests in transferred assets                                                                                             |   |                                                                              | (1,094  | )                        |        |         | (3,524  | )    |         |         | (3,253  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Advances from (to) unconsolidated affiliates, net                                                                                                  |   |                                                                              | (548    | )                        |        |         | 929     |      |         |         | (1,555  | )
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Net cash used in investing activities                |                                                                                                                                                    |   | (21,377                                                                      | )       |                          |        | (47,917 | )       |      |         | (38,767 | )      
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of notes and debentures payable                                                                                             |   |                                                                              | 17,310  |                          |        |         | 10,000  |      |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of common stock                                                                                                             |   |                                                                              | 197     |                          |        |         |        |      |         |         | 2,061   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from debt issued by limited partnerships                                                                                                  |   |                                                                              | 24,955  |                          |        |         | 55,649  |      |         |         | 40,876  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of dividends on common stock                                                                                                               |   |                                                                              | (12,018 | )                        |        |         | (11,829 | )    |         |         | (14,771 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of dividends on preferred stock                                                                                                            |   |                                                                              | (251    | )                        |        |         | (250    | )    |         |         | (250    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of senior notes                                                                                                                            |   |                                                                              | (6,666  | )                        |        |         | (6,667  | )    |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of SBA debentures                                                                                                                          |   |                                                                              | (11,640 | )                        |        |         | (4,150  | )    |         |         | (1,500  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of issuance costs on notes and debentures                                                                                                  |   |                                                                              | (430    | )                        |        |         | (523    | )    |         |         | (119    | )
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Net cash provided by financing activities            |                                                                                                                                                    |   | 11,457                                                                       |         |                          |        | 42,230  |         |      |         | 26,297  |        
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                    |   | (1,284                                                                       | )       |                          |        | 4,468   |         |      |         | 1,223   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                                                                                                                    |   | 23,193                                                                       |         |                          |        | 18,725  |         |      |         | 17,502  |        
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Cash and cash equivalents, end of year               |                                                                                                                                                    | $ | 21,909                                                                       |         |                          | $      | 23,193  |         |      | $       | 18,725  |        
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|Supplemental disclosure:                            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest paid                                                                                                                                      |   | $                                                                            | 5,348   |                          |        | $       | 5,328   |      |         | $       | 5,474   |  
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|                                                     | Dividends reinvested                                                                                                                               |   | $                                                                            |        |                          |        | $       |        |      |         | $       | 700     |  
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|                                                     | Reclassification from loans receivable to real property owned                                                                                      |   | $                                                                            |        |                          |        | $       | 377     |      |         | $       | 109     |  
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        
|                                                     | Loans and interest receivable transferred to limited partnerships, net                                                                             |   | $                                                                            | 3,154   |                          |        | $       | 4,832   |      |         | $       | 5,471   |  
|                                                     |                                                                                                                                                    |   |                                                                              |         |                          |        |         |         |      |         |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-11



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




Note 1. Summary of Significant Accounting Policies:

Business
PMC Capital, Inc. (PMC Capital and, together with its subsidiaries, we or
our) is a diversified closed-end management investment company that operates
as a business development company (BDC) under the Investment Company Act of
1940, as amended (the 1940 Act). Our common stock (the Common Stock) is
traded on the American Stock Exchange under the symbol PMC.

We are engaged in the business of originating loans to small businesses either
directly or through our three principal subsidiaries: First Western SBLC, Inc.
(First Western), PMC Investment Corporation (PMCIC) and Western Financial
Capital Corporation (Western Financial). We primarily originate loans to
individuals and small business concerns in the lodging industry. We also
target the medical, restaurant, service, retail and commercial real estate
industries. We are a national lender that primarily lends to businesses in the
southwest and southeast regions of the United States. In addition to our
lending operations, we earn revenue as an investment advisor who evaluates and
services loans and other investment alternatives pursuant to a fee arrangement
with PMC Commercial Trust (PMC Commercial). PMC Commercial is a real estate
investment trust and our affiliate as a result of common management.

First Western, PMCIC and Western Financial are registered under the 1940 Act as
diversified closed-end management investment companies. In addition, PMC
Capital is either directly or indirectly the sole shareholder or partner of
several non-investment company act subsidiaries. These are: PMC Advisers, Ltd.
and its subsidiary (PMC Advisers); PMC Funding Corp. and its subsidiary (PMC
Funding); PMC Capital Limited Partnership (the 1996 Partnership); PMC
Capital, L.P. 1998-1 (the 1998 Partnership) and PMC Capital, L.P. 1999-1 (the
1999 Partnership).

Additionally, PMC Capital owns approximately 33% of PMC Joint Venture, L.P.
2000 (the 2000 Joint Venture, and together with the 1996 Partnership, the
1998 Partnership and the 1999 Partnership, the Limited Partnerships).

Principles of Consolidation

The consolidated financial statements include the accounts of PMC Capital and
its wholly-owned regulated investment company subsidiaries, First Western,
PMCIC and Western Financial. Inter-company transactions have been eliminated
in consolidation.

The accounts of our wholly-owned non-investment company act subsidiaries (other
than the Limited Partnerships), PMC Advisers and PMC Funding are accounted for
by the equity method of accounting in conformity with Federal securities laws.
Our interest in the Limited Partnerships is accounted for as retained interests
in transferred assets.

Consolidated Subsidiaries

First Western is a small business lending company (SBLC) that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration (SBA) pursuant to its Section SBA 7(a) program (the SBA 7(a)
program).

PMCIC is a licensed specialized small business investment company (SSBIC)
under the Small Business Investment Act of 1958, as amended (SBIA). PMCIC
uses long-term funds provided by the SBA, together with its own capital, to
provide long-term collateralized loans to eligible small businesses owned by
disadvantaged persons, as defined under the regulations of the SBA. The
interest rates on loans originated by PMCIC are either fixed or variable based
on the prime lending rate (Prime Rate). As an SSBIC, PMCIC is eligible to
obtain long-term, fixed-rate, funding from the SBA through the issuance of
debentures.

Western Financial is a licensed small business investment company (SBIC)
under the SBIA that provides long-term loans to borrowers whether or not they
qualify as disadvantaged. The interest rates on loans originated by Western
Financial are either fixed or variable based on the Prime Rate. As an SBIC,
Western Financial is eligible to obtain long-term, fixed-rate, funding from the
SBA through the issuance of debentures.

F-12



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PMC Capital originates loans to borrowers on a non-SBA supported basis using
similar criteria as that used for other loans that are funded under the SBA
programs utilized by the subsidiaries. These loans are made to borrowers who
exceed the eligibility requirements of the SBA 7(a) program or SBIC programs.

Unconsolidated Subsidiaries

PMC Advisers acts as the investment advisor for PMC Commercial. PMC Funding
holds assets on our behalf.

Limited Partnerships

The 1996 Partnership, the 1998 Partnership and the 1999 Partnership were formed
as Delaware limited partnerships in connection with our securitization and
structured financing transactions to be special purpose entities (SPEs) that
acquired loans from us and issued debt through private placements.

The 2000 Joint Venture was formed as a Delaware limited partnership in
connection with a co-securitization transaction completed in December 2000 with
our affiliate, PMC Commercial. The 2000 Joint Venture is an SPE that acquired
loans from us and PMC Commercial and issued debt through a private placement.

The transfer of assets to the Limited Partnerships have been accounted for as
sales and our remaining retained interests in the Limited Partnerships are
accounted for as retained interests in transferred assets.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires us 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.

Valuation of Investments

All investments are valued at our Board of Directors estimate of fair value.

Loans Receivable:The Board of Directors has estimated the fair value of loans
receivable to approximate the remaining unamortized principal of the loans,
unless there is doubt as to the realization of the loan (a Problem Loan). A
valuation reserve is established for a Problem Loan based on the creditors
payment history, collateral value, guarantor support and other factors. In the
absence of a readily ascertainable market value, the estimated value of our
portfolio of loans may differ significantly from the values that would be
placed on the portfolio if a ready market for the loans existed.

Loans receivable are generally classified as non-accrual if they are past due
as to maturity or payment of principal or interest for a period of more than 60
days. If a loan or a portion of a loan is classified as doubtful or is
partially reserved or charged-off, the loan is classified as non-accrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as non-accrual if repayment in full of principal and/or
interest is in doubt.

When we sell the SBA-guaranteed portion of loans, a portion of the sale
proceeds representing the difference in the face amount of the unguaranteed
portion of the loans and the value of the loans (the Retained Loan Discount)
is recorded as a reduction in basis of the retained portion of the loan rather
than premium income. Unless the underlying loans are prepaid or sold, the
Retained Loan Discount is amortized over the life of the underlying loan based
on an effective yield method. When a loan is prepaid, the remaining Retained
Loan Discount is recognized as an increase to interest income. When a loan is
sold, the remaining Retained Loan Discount is included as a reduction to the
basis of the retained portion of the underlying loan sold.

Retained Interests in Transferred Assets:The transfer of assets that
qualifies for sale treatment under Statement of Financial Accounting Standards
No. 125  Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS No. 125) is generally accounted for by
the seller by: (i) derecognizing all assets sold, (ii) recognizing all assets
obtained and liabilities incurred at their relative fair value, and (iii)
recognizing all assets retained at their allocated previous carrying amount

F-13



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

based on relative fair values. We typically receive cash and retain the right
to receive servicing fees and the right to receive future interest income on
loans sold that exceed the contractually specified servicing fee (the
interest-only strip receivable) in exchange for a portion of the loan. Our
retained interests in the transferred assets (the Retained Interests) are
comprised of three separate assets; (1) the Reserve Fund, and the interest
earned thereon, which is the cash required to be kept in a liquid cash account
pursuant to the securitization documents; (2) the subordinated portion of the
sold loans (commonly referred to as the B Piece or the over-collateralized"/
OC portions of the loans) and, (3) the excess cash flows generated, if any,
after payment of (a) all interest and principal amount due to the purchaser of
the loans or the Noteholders, (b) payment of all principal and interest on
the B Piece, (c) the repayment of the corpus of the Reserve Fund and (d)
ongoing costs of the transaction. This excess cash is the interest-only strip
receivable or the IO Receivable. The difference between (i) the carrying
value of the assets sold and (ii) the sum of (a) cash received, and (b) the
present value of the discounted future cash flows from the Retained Interests,
constitutes the gain on sale.

The discount rates that we utilize for each of the components of the Retained
Interests are estimates of market rates based on interest rate levels at the
time of completion of the transaction considering the risks inherent in the
transaction.

On a quarterly basis, we measure the fair value of and record income relating
to the Retained Interests based upon the future anticipated cash flows
discounted to reflect the current market interest rates for investments of this
type. Any appreciation (depreciation) of the Retained Interests is reflected
on the accompanying consolidated statements of income as investments
written-off or as an unrealized gain (loss) on investment.

The estimated future cash flows are based in part upon our estimate of
prepayment speeds and default rates. There can be no assurance of the accuracy
of these estimates.

Cash Equivalents:We consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at value, which approximates cost.

Investment in Unconsolidated Subsidiaries:Our investments in unconsolidated
subsidiaries are carried at value, which approximates the basis in our
unconsolidated subsidiaries under the equity method of accounting.

Restricted Investments:Our restricted investments consist of highly liquid
investments purchased with an original maturity of three months or less.
Restricted investments are carried at value, which approximates cost.

Mortgage-Backed Security of Affiliate:The mortgage-backed security represents
the ownership of the Class B notes of the 1998 Partnership and is valued based
on discounted cash flow techniques.

Real Property Owned:Real property owned is carried at our Board of Directors
estimate of fair value, based upon appraisals and other factors.

Concentration of Credit Risk

At various times throughout the year, we maintain cash and cash equivalents and
restricted investments in accounts with various financial institutions in
excess of the amount insured by the Federal Deposit Insurance Corporation. We
regularly monitor the financial stability of these financial institutions and
do not believe there is a significant credit risk associated with deposits in
excess of federally insured amounts.

Deferred Charges

Costs incurred in connection with the issuance of SBA debentures and notes
payable are included in deferred charges, deposits and other assets. These
costs are amortized over the life of the related obligation.

F-14



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

Property, equipment and leasehold improvements are carried at their value,
which is cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using accelerated and straight-line methods, with
estimated useful lives ranging from five to 15 years.

Net Unrealized Appreciation (Depreciation) on Investments

Included in net unrealized appreciation (depreciation) on investments on the
accompanying consolidated balance sheets are valuation allowances for loans
receivable and unrealized appreciation (depreciation) of our Retained
Interests.

Interest Income

Interest income includes interest earned on loans and our short-term
investments. Interest income on loans is accrued as earned and the accrual of
interest is generally suspended when the related loan becomes 60 days past due
(a Non-Accrual Loan). Interest income on a Non-Accrual Loan is recognized on
a cash basis.

Premium Income

Premium income represents the differential between the value attributable to
the sale of a loan to the secondary market and the principal balance (cost) of
the loan. The sale price includes the value attributable to any excess
servicing spread retained by us plus any cash received.

Realized and Unrealized Gain (Loss) on Investments

Realized gains or losses are measured by the difference between the proceeds
from the sale and the cost basis of the investment, without regard to
unrealized gains and losses previously recognized. The gain or loss also
includes loans written-off during the year and recoveries of loans written-off
in prior years.

Other changes in the value of investments are included as changes in the
unrealized appreciation (depreciation) on investments in the accompanying
consolidated statements of income.

Federal Income Taxes

We have elected to be treated as a regulated investment company by meeting
certain requirements of the Internal Revenue Code relating to the distribution
of our net investment income to shareholders. Thereby we incur no Federal
income tax liability on such income. Based on our status as a regulated
investment company, we may elect to retain, deem to distribute or distribute,
in whole or in part, net long-term capital gains realized on the disposition of
our investments.

Any dividends we declared in October, November or December of any calendar
year, payable to shareholders of record on a specified date in such month and
actually paid during January of the following year, may be treated as if the
shareholders received it on December 31 of the year declared.

Distributions to Shareholders

Distributions to shareholders are recorded on the ex-dividend date.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on previously
reported net income or shareholders equity.

Note 2. Loans Receivable:

Loans receivable consist primarily of loans made under SBIC, SSBIC and SBLC
programs established by the SBA and financings to businesses outside of the SBA
loan programs.

As an SBLC, First Western originates loans which are partially guaranteed by
the SBA and which are collateralized generally, with first liens on real and/or
personal property of the borrower. The SBA guarantees repayment of up to 80%
of the principal amount of the loans originated by First Western. First
Western sells, without recourse, the guaranteed portion of its loans into the
secondary market (SBA Guaranteed Sales) while retaining the rights to service
the loans. First Westerns loans: (i) generally

F-15



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

range in original principal amount from $50,000 to $1,100,000, (ii) provide for
a variable rate of interest based on 1.0% to 2.75% above the then prevailing
prime rate, (iii) have a term of seven to 25 years, (iv) may be prepaid without
penalty and (v) require monthly payments covering accrued interest and
amortization of principal based in part on the remaining useful life of the
assets collateralizing the loans and on the borrowers use of loan proceeds.
At December 31, 2000, included in loans receivable are approximately $1.1
million which represents the guaranteed portion of First Western loans
available for sale.

The principal balance of the loans serviced on behalf of third parties by First
Western was approximately $76.7 million and $87.2 million at December 31, 2000
and 1999, respectively.

PMCIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon five to 20 year amortization
periods, with the balance due at maturity. These loans are collateralized by
first liens on real and/or personal property and are generally guaranteed by
the principals of the borrower.

PMC Capital originates loans to borrowers on a non-SBA supported basis, using
similar criteria for loans that are funded under the SBA programs utilized by
its three principal subsidiaries. These loans are: (i) to borrowers who
exceed the eligibility requirements of the SBA 7(a) program or SBIC programs,
(ii) payable in monthly installments of principal and interest based upon four
to 25 year amortization periods, with the balance due at maturity, (iii)
generally collateralized by real estate and/or equipment, (iv) contain
prepayment fees, and (v) are generally guaranteed by the principals of the
borrower.

Our portfolio of investments consists of loans to borrowers located principally
in the southern portion of the United States. The most significant
concentration of retained loans were to borrowers in Texas and Georgia, as
noted below:

|               |  |                              |     |      |  |  |     |   |  |  |  |  |  |  |  | 
|-------------- |  | ---------------------------- | --- | ---- |  |  | --- | - |  |  |  |  |  |  |  | 
|               |  | Percentage of Loan Portfolio
|State          |  | December 31,                
|               |  |                             
|               |  | 2000                         |     | 1999
|               |  |                              |     |     
|Texas          |  |                              | 20  | %    |  |  | 27  | %
|              
|              
|              
|              
|Georgia        |  |                              | 15  | %    |  |  | 13  | % |  |  |  |  |  |  |  | 
|              
|              
|              
|              
|Arizona        |  |                              | 11  | %    |  |  | 8   | % |  |  |  |  |  |  |  | 
|              
|              
|              
|              
|North Carolina |  |                              | 6   | %    |  |  | 6   | %
|              
|              
|              
|              
|Florida        |  |                              | 4   | %    |  |  | 4   | %
|              
|              
|              
|              
|Other          |  |                              | 44  | %    |  |  | 42  | %
|               |  |                              |     |      |  |  |     |  
|               |  |                              | 100 | %    |  |  | 100 | %
|               |  |                              |     |      |  |  |     |  

The activity in net unrealized depreciation on loans receivable is as follows:

|                             |  |                          |         |      |  |   |          |  
|---------------------------- |  | ------------------------ | ------- | ---- |  | - | -------- | -
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2000                     |         | 1999
|                             |  |                          |         |     
|Balance, beginning of period |  | $                        | 190,000 |      |  | $ | 594,000  |  
|                            
|                            
|                            
|                            
|Provision for losses         |  |                          | 486,000 |      |  |   | 131,000  |  
|                            
|                            
|                            
|                            
|Loans written-off            |  |                          | (17,000 | )    |  |   | (535,000 | )
|                             |  |                          |         |      |  |   |          |  
|Balance, end of period       |  | $                        | 659,000 |      |  | $ | 190,000  |  
|                             |  |                          |         |      |  |   |          |  

Loans receivable with an aggregate retained balance of $3.0 million and $1.0
million were greater than 60 days past due, litigation against the borrowers
has commenced, the loan has been identified as a Problem Loan or the loans are
in the process of liquidation at December 31, 2000 and 1999, respectively.

At December 31, 2000 the recorded investment in loans identified as impaired in
accordance with SFAS No. 114 totaled $3.0 million. We did not have any
impaired loans without valuation reserve, since the estimated fair value of the
collateral for each impaired loan was less than the respective loan balance.
At

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2000 we had a corresponding valuation allowance of $659,000 on our
impaired loans. We did not recognize any material amount of interest on
impaired loans during the portion of the period that they were impaired. Had
these impaired loans performed in accordance with their original terms,
interest income of approximately $330,000 would have been recognized during the
year ended December 31, 2000.

At December 31, 1999 the recorded investment in loans identified as impaired in
accordance with SFAS No. 114 totaled $0.5 million of which approximately $0.3
million related to loans with no valuation reserve, since the estimated fair
value of the collateral for each loan exceeds the respective loan balance.
Approximately $0.2 million of these loans at December 31, 1999, have a
corresponding valuation allowance of $0.2 million. We did not recognize any
material amount of interest on impaired loans during the portion of the period
that they were impaired. Had these impaired loans performed in accordance with
their original terms, interest income of approximately $50,000 would have been
recognized during the year ended December 31, 1999.

Note 3. Retained Interests in Transferred Assets:

Upon securitization and sale of our loan pools, we value the Retained
Interests in accordance with SFAS No. 125 since our securitizations meet
the definition of a transfer under SFAS No. 125. Our Retained Interests
are comprised of three separate assets; (1) the Reserve Fund, and the
interest earned thereon, which is the required cash to be kept in a liquid
cash account pursuant to the securitization documents, (2) the
subordinated portion of the sold loans (commonly referred to as the B
Piece or the over-collateralized"/ OC portions of the loans), and (3)
the excess cash flow that is to be received by us in the future after
payment of (a) all interest and principal amount due to the purchaser of
the loans or the Noteholders, (b) payment of all principal and interest
on the B Piece, (c) the repayment of the corpus of the Reserve Fund and
(d) ongoing costs of the transaction. This excess cash flow is the
interest-only strip receivable or the IO Receivable.

Due to the limited number of companies that securitize our type of loans, the
relatively small size of our Retained Interests, and the limited number of
buyers for securitization traunches other than Aaa, no quoted market
value of our Retained Interests exists. Therefore, the fair value is
based on managements estimate of the fair market value utilizing the
present value of expected future cash flows. This value may or may not
vary significantly from what a willing buyer would pay for these assets.

Utilizing the present value of expected future cash flows technique requires
that estimates be used in determining (1) the amount of expected future cash
flows, (2) the timing of those cash flows, and (3) the discount rate. The
value of our Retained Interests is determined based on managements assumptions
concerning, among other things, anticipated defaults and loan losses and
anticipated prepayment speeds. The discount rates that we utilize are
determined for each of the assets comprising the Retained Interests based upon
the inherent risk associated with each asset. Actual defaults and prepayments
may vary from our assumptions, possibly to a material degree.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our Retained Interests are comprised of the following as of December 31, 2000
and 1999, respectively:

|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|------------------------ |  | ----------------- | ------ | -------- |  | ------------ | ------ | ------------- |  | - | ----- |  |  | - | ----- | 
|                         |  | December 31, 2000
|                         |  |                  
|                         |  | Total             |        | OC Piece |  | Reserve Fund |        | IO Receivable
|                         |  |                   |        |          |  |              |        |              
|First Western            |  | $                 | 4,004  |          |  | $            |       |               |  | $ | 1,142 |  |  | $ | 2,862 | 
|                        
|                        
|                        
|                        
|1996 Limited Partnership |  |                   | 6,568  |          |  |              | 5,749  |               |  |   | 819   |  |  |   |      | 
|                        
|                        
|                        
|                        
|1998 Limited Partnership |  |                   | 5,249  |          |  |              | 1,999  |               |  |   | 2,086 |  |  |   | 1,164 | 
|                        
|                        
|                        
|                        
|1999 Limited Partnership |  |                   | 10,832 |          |  |              | 4,346  |               |  |   | 2,465 |  |  |   | 4,021 | 
|                        
|                        
|                        
|                        
|2000 Joint Venture       |  |                   | 5,688  |          |  |              | 3,256  |               |  |   | 1,314 |  |  |   | 1,118 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|                         |  | $                 | 32,341 |          |  | $            | 15,350 |               |  | $ | 7,826 |  |  | $ | 9,165 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 

|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|------------------------ |  | ----------------- | ------ | -------- |  | ------------ | ------ | ------------- |  | - | ----- |  |  | - | ----- | 
|                         |  | December 31, 1999
|                         |  |                  
|                         |  | Total             |        | OC Piece |  | Reserve Fund |        | IO Receivable
|                         |  |                   |        |          |  |              |        |              
|First Western            |  | $                 | 4,694  |          |  | $            |       |               |  | $ | 1,269 |  |  | $ | 3,425 | 
|                        
|                        
|                        
|                        
|1996 Limited Partnership |  |                   | 6,525  |          |  |              | 6,088  |               |  |   | 437   |  |  |   |      | 
|                        
|                        
|                        
|                        
|1998 Limited Partnership |  |                   | 6,489  |          |  |              | 2,373  |               |  |   | 2,390 |  |  |   | 1,726 | 
|                        
|                        
|                        
|                        
|1999 Limited Partnership |  |                   | 10,700 |          |  |              | 4,618  |               |  |   | 2,528 |  |  |   | 3,554 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|                         |  | $                 | 28,408 |          |  | $            | 13,079 |               |  | $ | 6,624 |  |  | $ | 8,705 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 

Retained Interest Details:

First Western.First Western sells the unguaranteed portion of some of its
originated loans through private placements (SBA Unguaranteed Sales). First
Western retains the right to service all such loans. In addition, the SBA
guaranteed portions of First Westerns loans are sold to either dealers in
government guaranteed loans or institutional investors.

PMC Capital Limited Partnership.On November 13, 1996, the 1996 Partnership
(a special purpose affiliate of PMC Capital) completed a private placement of
approximately $40.7 million of its Loan-Backed Fixed Rate Notes, Series 1996-A
(the 1996 Notes). The 1996 Notes, issued at par, which have a stated
maturity in 2011 and bear interest at the rate of 6.725% per annum, are
collateralized by loans contributed by PMC Capital to the 1996 Partnership. In
connection with this private placement, the 1996 Notes were given a rating of
Aa2 by Moodys Investors Service. During the year ended December 31, 1996,
PMC Capital contributed approximately $45.7 million in loans to the 1996
Partnership without recourse. This transaction was accounted for as a
structured financing.

PMC Capital L.P. 1998-1.On November 24, 1998, the 1998 Partnership (a
special purpose affiliate of PMC Capital) completed a private placement of
approximately $39.6 million of its Loan-Backed Variable Rate Notes, Series
1998-1 (the 1998 Notes). The 1998 Notes, issued at par, which have a stated
maturity in 2021 and bear interest at the prime rate as published in the Wall
Street Journal (adjusted quarterly) less 1%, are collateralized by loans
contributed by PMC Capital to the 1998 Partnership. In connection with this
private placement, the Notes were given a rating of Aaa by Moodys Investors
Service. During November 1998, PMC Capital contributed approximately $43.1
million of loans to the 1998 Partnership without recourse and recorded a net
gain of $925,000.

PMC Capital L.P. 1999-1.On June 3, 1999, the 1999 Partnership (a special
purpose affiliate of PMC Capital) completed a private placement of
approximately $55.6 million of its Loan-Backed Fixed Rate Notes, Series 1999-1
(the 1999 Notes). The 1999 Notes, issued at par, which have a stated
maturity in 2024, bear interest at 6.6% and are collateralized by loans
contributed by PMC Capital to the 1999 Partnership. In connection with this
private placement, the Notes were given a rating of Aaa by Moodys Investors
Service. During the year ended December 31, 1999, PMC Capital contributed
approximately $60.3 of loans to the 1999 Partnership without recourse and
recorded a net gain of $2,564,000.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PMC Joint Venture, LP 2000.On December 18, 2000, the 2000 Joint Venture (a
newly formed special purpose affiliate of PMC Capital and PMC Commercial)
completed a private placement of approximately $74.5 million of its Loan-Backed
Fixed Rate Notes, Series 2000 (the 2000 Notes). PMC Capital owns
approximately 33.5% of the 2000 Joint Venture as of December 31, 2000.
Accordingly, PMC Capitals share of the 2000 Notes amounts to approximately
$24.9 million (the 2000 PMC Notes, and together with the 1996 Notes, the 1998
Notes and the 1999 Notes, the Structured Notes) as of December 31, 2000. The
2000 PMC Notes, issued at par, which have a stated maturity in 2024 and bear
interest at 7.28%, are collateralized by loans contributed by PMC Capital and
PMC Commercial to the 2000 Joint Venture. In connection with this private
placement, the 2000 Notes were given a rating of Aaa by Moodys Investors
Service. During the year ended December 31, 2000, PMC Capital contributed
approximately $28.1 million of loans to the 2000 Joint Venture without recourse
and recorded a net gain of $564,000. At December 31, 2000, the aggregate
remaining principal balance of those loans was $28.0 million and the
outstanding balance on the 2000 PMC Notes was $24.9 million. During the period
from December 14, 2000 (inception) to December 31, 2000, our limited
partnership share of the net income of the 2000 Joint Venture was approximately
$46,000.

The terms of the Structured Notes provide that the partners of the respective
Limited Partnerships are not liable for any payment on the respective notes.
Accordingly, the Limited Partnerships have the exclusive obligation for the
repayment of the respective notes, and the holders of the respective notes have
no recourse to PMC Capital or its other subsidiaries or their assets in the
event of nonpayment of the underlying loans. The net proceeds from the
issuance of the respective notes have been distributed to PMC Capital. With
regard to the 2000 Joint Venture, PMC and PMC Commercial have agreed to
cross-indemnify to the extent that the poor performance of the loans of one
company impairs the required cash flow distributions to the other company.

In determining the gain on sale of loans and fair value of the Retained
Interests related to our securitization and sale transactions, we utilize
certain assumptions which include:

|                    |  |                                   |  |                                  
|------------------- |  | --------------------------------- |  | ---------------------------------
|                    |  | SBA 7(a)
Transactions             |  | Non-SBA 7(a)
Transactions        
|                    |  |                                   |  |                                  
|Prepayment rate (a) |  | Minimum 17% CPR                   |  | Minimum 7% CPR                   
|                   
|                   
|                   
|                   
|Loss rate (b)       |  | Range from 0.4% to 0.7% per annum |  | Range from 0.3% to 0.6% per annum
|                   
|                   
|                   
|                   
|Discount rate (c)   |  | Range from 11% to 14%             |  | Range from 9.3% to 14%           

(a) The prepayment rate is based on current performance of the respective loan
pools, adjusted for anticipated principal payments considering the current loan
pools and similar loans. The minimum rates are for the year ending December
31, 2001.

(b) Credit exposure exists to the extent of possible default on the underlying
collateral requiring payment from anticipated future residual interests. We
believe that a range of 0.3% to 0.7% loss rate covers this inherent risk. For
SBA 7(a) guaranteed loan sales, there are no assumed losses since all principal
losses are the responsibility of the SBA.

(c) The discount rates are as of December 31, 2000 and are based upon our
estimate of comparable rates which would be used by potential purchasers of
similar assets. The discount rates (1) range from 9.3% to 9.5% for our B
Pieces, (2) are 11% for our Reserve Fund and (3) are 14% for our IO
Receivables.

F-19



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following information summarizes the financial position at December 31,
2000 and 1999 and the results of operations for the years ended December 31,
2000, 1999 and 1998 of the SPEs created in connection with our securitization
transactions:

Summary of Financial Position:

|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      |  |  |  |  | 
|--------------------- |  | ------------------- | ---- | ------------------ |  | ------------------ | ---- | --------- |  | ---- | ---- | ---- |  | -------- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | ----- | ---- |  |  |  |  | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  | PMC  
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  | Joint
|                      |  | PMC Capital         |      | PMC Capital, L. P. |  | PMC Capital, L. P. |      | Venture  
|                      |  | Limited Partnership |      | 1998-1             |  | 1999-1             |      | L.P. 2000
|                      |  |                     |      |                    |  |                    |      |          
|                      |  | 2000                |      | 1999               |  | 2000               |      | 1999      |  | 2000 |      | 1999 |  | 2000 (1)
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |         
|                      |  | (In
millions)      
|Loans Receivable, Net |  | $                   | 12.0 |                    |  | $                  | 14.2 |           |  | $    | 34.9 |      |  | $        | 39.4 |  |  | $ | 55.3 |  |  | $ | 57.5 |  |  | $     | 83.6 | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      | 
|Total Assets          |  | $                   | 12.9 |                    |  | $                  | 15.0 |           |  | $    | 38.5 |      |  | $        | 44.0 |  |  | $ | 59.8 |  |  | $ | 62.2 |  |  | $     | 87.4 | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      | 
|Notes Payable         |  | $                   | 6.4  |                    |  | $                  | 8.7  |           |  | $    | 33.3 |      |  | $        | 38.0 |  |  | $ | 51.1 |  |  | $ | 53.2 |  |  | $     | 74.5 | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      | 
|Total Liabilities     |  | $                   | 6.5  |                    |  | $                  | 8.8  |           |  | $    | 34.0 |      |  | $        | 38.7 |  |  | $ | 52.2 |  |  | $ | 54.3 |  |  | $     | 74.7 | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      | 
|Partners Capital     |  | $                   | 6.4  |                    |  | $                  | 6.2  |           |  | $    | 4.5  |      |  | $        | 5.3  |  |  | $ | 7.6  |  |  | $ | 7.9  |  |  | $     | 12.7 | 
|                      |  |                     |      |                    |  |                    |      |           |  |      |      |      |  |          |      |  |  |   |      |  |  |   |      |  |  |       |      | 



|(1) |  | Balances represent PMC Capitals and PMC Commercials limited partnership interests in
PMC Joint Venture, L.P. 2000
|--- |  | -------------------------------------------------------------------------------------------------------------------

Summary of Operations:

|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     |  |  |  |  | 
|---------------- |  | ------------------- | --- | ------------------ |  | ------------------ | --- | ---- |  | ---- | --- | -------- |  | ---- | --- | -------- |  | -------- | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | --------- | --- |  |  |  |  | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  | PMC Joint
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  | Venture  
|                 |  | PMC Capital         |     | PMC Capital, L. P. |  | PMC Capital, L. P. |     | L.P.
|                 |  | Limited Partnership |     | 1998-1             |  | 1999-1             |     | 2000
|                 |  |                     |     |                    |  |                    |     |     
|                 |  | 2000                |     | 1999               |  | 1998               |     | 2000 |  | 1999 |     | 1998 (1) |  | 2000 |     | 1999 (2) |  | 2000 (3)
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |         
|                 |  | (In
millions)      
|Interest Income  |  | $                   | 1.6 |                    |  | $                  | 2.0 |      |  | $    | 3.4 |          |  | $    | 4.1 |          |  | $        | 3.9 |  |  | $ | 0.4 |  |  | $ | 5.7 |  |  | $ | 3.4 |  |  | $         | 0.3 | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Total Revenues   |  | $                   | 1.7 |                    |  | $                  | 2.2 |      |  | $    | 4.1 |          |  | $    | 4.2 |          |  | $        | 4.0 |  |  | $ | 0.5 |  |  | $ | 5.7 |  |  | $ | 3.5 |  |  | $         | 0.3 | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Interest Expense |  | $                   | 0.5 |                    |  | $                  | 0.8 |      |  | $    | 1.5 |          |  | $    | 2.8 |          |  | $        | 2.7 |  |  | $ | 0.3 |  |  | $ | 3.4 |  |  | $ | 2.1 |  |  | $         | 0.2 | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Total Expenses   |  | $                   | 0.6 |                    |  | $                  | 0.9 |      |  | $    | 1.7 |          |  | $    | 3.0 |          |  | $        | 2.9 |  |  | $ | 0.3 |  |  | $ | 3.6 |  |  | $ | 2.2 |  |  | $         | 0.2 | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Net Income       |  | $                   | 1.1 |                    |  | $                  | 1.3 |      |  | $    | 2.4 |          |  | $    | 1.2 |          |  | $        | 1.1 |  |  | $ | 0.2 |  |  | $ | 2.1 |  |  | $ | 1.3 |  |  | $         | 0.1 | 
|                 |  |                     |     |                    |  |                    |     |      |  |      |     |          |  |      |     |          |  |          |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 



|(1) |  | For the period from October 23, 1998 (Inception) to December 31, 1998                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | For the period from May 27, 1999 (Inception) to December 31, 1999                                                                                                                             
|   
|   
|   
|   
|(3) |  | For the period from December 14, 2000 (Inception) to December 31, 2000 The balances represent
PMC Capitals and PMC Commercials limited partnership interests in PMC Joint Venture, L.P. 2000

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with FASB No. 140, management has performed a sensitivity
analysis of our retained interests in transferred assets to highlight the
volatility that results when prepayments, losses and discount rates are
different than managements original assumptions.

The following summarizes the results of the sensitivity analysis as of December
31, 2000:

|                                              |  |                 |            |                 |  |   |           | 
|--------------------------------------------- |  | --------------- | ---------- | --------------- |  | - | --------- | 
|Changed Assumption                            |  | Pro-Forma Value |            | Asset Reduction
|                                              |  |                 |            |                
|Losses increase by 50 basis points per annum  |  | $               | 30,157,000 |                 |  | $ | 2,184,000 | 
|                                             
|                                             
|                                             
|                                             
|Losses increase by 100 basis points per annum |  | $               | 28,048,000 |                 |  | $ | 4,293,000 | 
|                                             
|                                             
|                                             
|                                             
|Prepayments increase by 5% per annum          |  | $               | 31,191,000 |                 |  | $ | 1,150,000 | 
|                                             
|                                             
|                                             
|                                             
|Prepayments increase by 10% per annum         |  | $               | 30,335,000 |                 |  | $ | 2,006,000 | 
|                                             
|                                             
|                                             
|                                             
|Discount rates increase by 1%                 |  | $               | 30,841,000 |                 |  | $ | 1,500,000 | 
|                                             
|                                             
|                                             
|                                             
|Discount rates increase by 2%                 |  | $               | 29,941,000 |                 |  | $ | 2,400,000 | 

Note 4. Investment in Unconsolidated Subsidiaries:

As described in Note 1, the consolidated financial statements include the
accounts of PMC Capital and its wholly owned regulated investment company
subsidiaries. The accounts of PMC Advisers and PMC Funding Corp. are accounted
for by the equity method of accounting in conformity with Federal securities
law. The following are condensed financial statements of PMC Advisers and PMC
Funding as of December 31, 2000 and 1999 and for the three years in the period
ended December 31, 2000:

CONDENSED COMBINED BALANCE SHEETS(In
thousands)

|                      |                                             |              |                        |        |     |              |     |      |     |  |  | 
|--------------------- | ------------------------------------------- | ------------ | ---------------------- | ------ | --- | ------------ | --- | ---- | --- |  |  | 
|                      |                                             |              |                        |        |     | December 31,
|                      |                                             |              |                        |        |     |             
|                      |                                             |              |                        |        |     | 2000         |     | 1999
|                      |                                             |              |                        |        |     |              |     |     
|                      |                                             |              |                        | Assets
|                     
|                     
|                     
|                     
|Investments at value:
|                     
|                     
|                     
|                     
|                      | Property and equipment                      |              | $                      | 272    |     |              | $   |     |    
|                     
|                     
|                     
|                     
|                      | Due from affiliates                         |              |                        |       |     |              |     | 416  |    
|                     
|                     
|                     
|                     
|                      | Cash equivalents                            |              |                        | 93     |     |              |     | 50   |    
|                     
|                     
|                     
|                     
|                      | Other assets                                |              |                        | 131    |     |              |     | 159  |    
|                      |                                             |              |                        |        |     |              |     |     
|                      |                                             | Total assets |                        | $      | 496 |              |     | $    | 625 | 
|                      |                                             |              |                        |        |     |              |     |     
|                      |                                             |              | Liabilities and Equity
|                     
|                     
|                     
|                     
|Liabilities:         
|                     
|                     
|                     
|                     
|                      | Other liabilities                           |              | $                      | 348    |     |              | $   | 463  |    
|                      |                                             |              |                        |        |     |              |     |     
|                      |                                             |              | 348                    |        |     |              | 463 |     
|                      |                                             |              |                        |        |     |              |     |     
|Equity:              
|                     
|                     
|                     
|                     
|                      | Common stock and additional paid-in capital |              |                        | 527    |     |              |     | 527  |    
|                     
|                     
|                     
|                     
|                      | Accumulated deficit                         |              |                        | (379   | )   |              |     | (365 | )  
|                      |                                             |              |                        |        |     |              |     |     
|                      |                                             |              | 148                    |        |     |              | 162 |     
|                      |                                             |              |                        |        |     |              |     |     
|                      | Total liabilities and equity                |              | $                      | 496    |     |              | $   | 625  |    
|                      |                                             |              |                        |        |     |              |     |     

F-21



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF INCOME(In
thousands)

|           |                       |                |     |                                  |     |      |     |      |     |   |    |     |     | 
|---------- | --------------------- | -------------- | --- | -------------------------------- | --- | ---- | --- | ---- | --- | - | -- | --- | --- | 
|           |                       |                |     | For the Years Ended December 31,
|           |                       |                |     |                                 
|           |                       |                |     | 2000                             |     | 1999 |     | 1998
|           |                       |                |     |                                  |     |      |     |     
|Income:   
|          
|          
|          
|          
|           | Management fee income |                | $   | 500                              |     |      | $   | 563  |     |   | $  | 179 |    
|          
|          
|          
|          
|           | Sale of asset, net    |                |     |                                 |     |      |     | 235  |     |   |    |    |    
|          
|          
|          
|          
|           | Other income, net     |                |     | 40                               |     |      |     | 18   |     |   |    | 28  |    
|           |                       |                |     |                                  |     |      |     |      |     |   |    |    
|           |                       | Total income   |     |                                  | 540 |      |     |      | 816 |   |    |     | 207 | 
|           |                       |                |     |                                  |     |      |     |      |     |   |    |    
|Expenses: 
|          
|          
|          
|          
|           | Miscellaneous         |                |     | 60                               |     |      |     | 104  |     |   |    | 137 |    
|           |                       |                |     |                                  |     |      |     |      |     |   |    |    
|           |                       | Total expenses |     |                                  | 60  |      |     |      | 104 |   |    |     | 137 | 
|           |                       |                |     |                                  |     |      |     |      |     |   |    |    
|Net income |                       | $              | 480 |                                  |     | $    | 712 |      |     | $ | 70 |    
|           |                       |                |     |                                  |     |      |     |      |     |   |    |    

Note 5. Property and Equipment:

Property and equipment consisted of the following:

|                               |  |                    |          |      |  |   |          |  
|------------------------------ |  | ------------------ | -------- | ---- |  | - | -------- | -
|                               |  | As of December 31,
|                               |  |                   
|                               |  | 2000               |          | 1999
|                               |  |                    |          |     
|Furniture and equipment        |  | $                  | 589,000  |      |  | $ | 574,000  |  
|                              
|                              
|                              
|                              
|Automobile                     |  |                    | 13,000   |      |  |   | 13,000   |  
|                               |  |                    |          |      |  |   |          |  
|                               |  |                    | 602,000  |      |  |   | 587,000  |  
|                              
|                              
|                              
|                              
|Less: accumulated depreciation |  |                    | (438,000 | )    |  |   | (381,000 | )
|                               |  |                    |          |      |  |   |          |  
|                               |  | $                  | 164,000  |      |  | $ | 206,000  |  
|                               |  |                    |          |      |  |   |          |  

Depreciation and amortization expense for the years ended December 31, 2000,
1999 and 1998 was approximately $58,000, $61,000 and $152,000, respectively.
Included in amortization is approximately $89,000 during the year ended
December 31, 1998 to write-off leasehold improvements relating to the
previously occupied leased office space which was terminated on January 1,
1999.

Note 6. Notes and Debentures Payable:

At December 31, 2000 and 1999 outstanding notes payable were as follows:

|                                                              |  |                    |            |      |  |   |            | 
|------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | 
|                                                              |  | As of December 31,
|                                                              |  |                   
|                                                              |  | 2000               |            | 1999
|                                                              |  |                    |            |     
|Note payable, 7.20% interest rate, matures July 19, 2001      |  | $                  | 6,667,000  |      |  | $ | 13,333,000 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Note payable, 6.97% interest rate, matures December 15, 2002  |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Note payable, 8.60% interest rate, matures April 19, 2003     |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Note payable, 8.05% (1) interest rate, matures April 19, 2004 |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Note payable, 7.44% interest, matures July 19, 2005           |  |                    | 10,000,000 |      |  |   | 10,000,000 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Note payable, 8.15% (2) interest rate, matures July 19, 2004  |  |                    | 10,000,000 |      |  |   |           | 
|                                                              |  |                    |            |      |  |   |            | 
|                                                              |  | $                  | 41,667,000 |      |  | $ | 38,333,000 | 
|                                                              |  |                    |            |      |  |   |            | 

(1) Reset quarterly at 1.3% over the three month LIBOR at the time of reset.

(2) Reset quarterly at 1.4% over the three month LIBOR at the time of reset.

F-22



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The notes payable are uncollateralized and require us to meet certain covenants
(terms are as defined in the applicable note agreement), the most restrictive
of which require (i) that net loans receivable exceed 150% of senior funded
debt, (ii) the increase in our loan valuation reserve for any 12 month period
must not exceed 3% of net loans receivable and (iii) our consolidated earnings
plus interest expense must exceed 150% of interest expense. At December 31,
2000, we were in compliance with all of the covenants of these notes.

We have a $15 million uncollateralized revolving credit facility, amended on
March 22, 2000, which expires March 2002. Advances pursuant to the credit
facility bear interest at our option of the banks prime rate less 50 basis
points or the London Interbank Offering Rate (LIBOR) plus 175 basis points.
The credit facility requires that we meet certain covenants, the most
restrictive of which requires that the ratio of net charge-offs to net loans
receivable not exceed 2%, and the ratio of assets to senior debt (as defined
in the note agreement) will not fall below 135% for PMC Capital and 150% (as
defined in the note agreement) including our consolidated subsidiaries, as
amended. At December 31, 2000 and 1999 we had no outstanding amounts borrowed
on this credit facility, and we were in compliance with all covenants of this
facility.

Debentures payable represent amounts due to the SBA as a result of borrowing
made pursuant to the SBIA. At December 31, 2000, the maturities, interest
rates and principal payments on the SBA debentures were as follows:

|                  |  |               |       |        |  |   |            |  |  |  |  | 
|----------------- |  | ------------- | ----- | ------ |  | - | ---------- |  |  |  |  | 
|Maturity Date (1) |  | Interest Rate |       | Amount
|                  |  |               |       |       
|December 1, 2002  |  |               | 7.510 | %      |  | $ | 510,000    | 
|                 
|                 
|                 
|                 
|September 1, 2004 |  |               | 8.200 | %      |  |   | 3,000,000  | 
|                 
|                 
|                 
|                 
|September 1, 2004 |  |               | 8.200 | %      |  |   | 3,000,000  | 
|                 
|                 
|                 
|                 
|March 1, 2005     |  |               | 7.840 | %      |  |   | 3,000,000  | 
|                 
|                 
|                 
|                 
|June 1, 2005      |  |               | 6.690 | %      |  |   | 5,000,000  | 
|                 
|                 
|                 
|                 
|September 1, 2005 |  |               | 6.875 | %      |  |   | 7,000,000  | 
|                 
|                 
|                 
|                 
|September 1, 2006 |  |               | 7.590 | %      |  |   | 2,490,000  | 
|                 
|                 
|                 
|                 
|September 1, 2010 |  | (2)           | 7.452 | %      |  |   | 3,000,000  | 
|                 
|                 
|                 
|                 
|September 1, 2010 |  | (2)           | 7.452 | %      |  |   | 4,310,000  | 
|                  |  |               |       |        |  |   |            | 
|                  |  |               |       |        |  | $ | 31,310,000 | 
|                  |  |               |       |        |  |   |            | 



|(1) |  | During the year ended December 31, 2000 and 1999, we paid off $11,640,000
and $4,150,000,respectively, in debentures payable at their maturity.
Total debentures outstanding at December 31, 1999 were $35,640,000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Does not include the 1% annual fee that the SBA charges on all SBA
debentures issued after 1996.                                                                                                                   

As of December 31, 2000, the SBA has committed to us for the issuance of $5.2
million in new SBA debentures.

Principal payments required on the notes payable and debentures payable at
December 31, 2000, are as follows:

|             |      |       |            |                |  |               |            |            |  |   |            |            | 
|------------ | ---- | ----- | ---------- | -------------- |  | ------------- | ---------- | ---------- |  | - | ---------- | ---------- | 
|Year Ending 
|December 31, |      | Total |            | SBA Debentures |  | Notes Payable
|             |      |       |            |                |  |              
|             | 2001 |       | $          | 6,667,000      |  |               | $          |           |  |   | $          | 6,667,000  | 
|            
|            
|            
|            
|             | 2002 |       |            | 5,510,000      |  |               |            | 510,000    |  |   |            | 5,000,000  | 
|            
|            
|            
|            
|             | 2003 |       |            | 5,000,000      |  |               |            |           |  |   |            | 5,000,000  | 
|            
|            
|            
|            
|             | 2004 |       |            | 21,000,000     |  |               |            | 6,000,000  |  |   |            | 15,000,000 | 
|            
|            
|            
|            
|             | 2005 |       |            | 25,000,000     |  |               |            | 15,000,000 |  |   |            | 10,000,000 | 
|            
|            
|            
|            
|Thereafter   |      |       | 9,800,000  |                |  |               | 9,800,000  |            |  |   |           |           
|             |      |       |            |                |  |               |            |            |  |   |            |           
|             |      | $     | 72,977,000 |                |  | $             | 31,310,000 |            |  | $ | 41,667,000 |           
|             |      |       |            |                |  |               |            |            |  |   |            |           

F-23



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Borrower Advances:

As part of the monitoring process to verify that the borrowers cash equity is
utilized for its intended purpose, we receive deposits from the borrowers and
release the funds upon presentation of appropriate supporting documentation.
We had $1,549,000 and $2,415,000 in funds held on behalf of borrowers at
December 31, 2000 and 1999, respectively, which is included as a liability on
the accompanying consolidated balance sheets.

Note 8. Cumulative Preferred Stock of Consolidated Subsidiary:

PMCIC has outstanding 30,000 shares of $100 par value, 3% cumulative preferred
stock (the 3% Preferred Stock) and 40,000 shares of $100 par value, 4%
cumulative preferred stock (the 4% Preferred Stock). The 3% Preferred Stock
and the 4% Preferred Stock (collectively, the Preferred Stock) are held by
the SBA pursuant to the SBIA.

PMCIC is entitled to redeem, in whole or in part, the 3% Preferred Stock by
paying 35% of the par value of these securities plus dividends accumulated and
unpaid on the date of redemption. While the 3% Preferred Stock may be redeemed,
redemption is not mandatory. Dividends of approximately $90,000 on the 3%
Preferred Stock were recognized during each of the years ended December 31,
2000, 1999 and 1998.

The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from the date
of issuance. Dividends of $161,000, $160,000 and $160,000 were recognized on
the 4% Preferred Stock during the years ended December 31, 2000, 1999 and 1998,
respectively.

Neither series of Preferred Stock has any preemptive or conversion rights. The
Preferred Stock provides for a liquidation preference in the amount of $100 per
share plus accrued and unpaid dividends.

Note 9. Net Unrealized Appreciation on Investments and Realized and
Unrealized Gain (Loss) on Investments:

Net unrealized appreciation on investments is comprised of the following at
December 31, 2000 and 1999:

|                                         |  |              |       |      |  |   |      |  
|---------------------------------------- |  | ------------ | ----- | ---- |  | - | ---- | -
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2000         |       | 1999
|                                         |  |              |       |     
|Loans receivable                         |  | $            | (659  | )    |  | $ | (190 | )
|                                        
|                                        
|                                        
|                                        
|Retained interests in transferred assets |  |              | 1,379 |      |  |   | 590  |  
|                                        
|                                        
|                                        
|                                        
|Other investments                        |  |              | 82    |      |  |   |     |  
|                                         |  |              |       |      |  |   |      |  
|                                         |  | $            | 802   |      |  | $ | 400  |  
|                                         |  |              |       |      |  |   |      |  

F-24



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Activity in our investments written-off and change in unrealized appreciation
(depreciation) on investments is as follows:

|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | ---------- |  | ----- | -------- | - |  | - | ---------- | -
|                                                                |  | Year Ended December 31, 2000
|                                                                |  |                             
|                                                                |  | Retained Interests          
|                                                                |  | in Transferred               |            | Loans     
|                                                                |  | Assets                       |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off                                         |  | $                            |           |            |  | $     | (17,000  | ) |  | $ | (17,000    | )
|                                                               
|                                                               
|                                                               
|                                                               
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 871,000    |            |  |       | (469,000 | ) |  |   | 402,000    |  
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | 871,000    |            |  | $     | (486,000 | ) |  | $ | 385,000    |  
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|                                                               
|                                                                |  | Year Ended December 31, 1999
|                                                                |  |                             
|                                                                |  | Retained Interests          
|                                                                |  | in Transferred               |            | Loans     
|                                                                |  | Assets                       |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off                                         |  | $                            | (1,270,000 | )          |  | $     | (535,000 | ) |  | $ | (1,805,000 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 770,000    |            |  |       | 404,000  |   |  |   | 1,174,000  |  
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | (500,000   | )          |  | $     | (131,000 | ) |  | $ | (631,000   | )
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|                                                               
|                                                                |  | Year Ended December 31, 1998
|                                                                |  |                             
|                                                                |  | Retained Interests          
|                                                                |  | in Transferred               |            | Loans     
|                                                                |  | Assets                       |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off                                         |  | $                            |           |            |  | $     | (219,000 | ) |  | $ | (219,000   | )
|                                                               
|                                                               
|                                                               
|                                                               
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 120,000    |            |  |       | (100,000 | ) |  |   | 20,000     |  
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | 120,000    |            |  | $     | (319,000 | ) |  | $ | (199,000   | )
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  

During the years ended December 31, 2000, 1999 and 1998 we recognized gains of
$564,000, $2,564,000 and $925,000, respectively, from the sale of loans through
securitizations.

Note 10. Earnings Per Common Share Computations:

The computations of basic earnings per common share are based on the weighted
average number of our shares outstanding. The weighted average number of
shares used in the computations of basic earnings per common share was
11,841,000, 11,829,000 and 11,800,000 for the years ended December 31, 2000,
1999 and 1998, respectively. The fully diluted weighted average shares
outstanding were 11,845,000 and 11,831,000 during the year ended December 31,
2000 and 1999, respectively. There was no change in the weighted average
shares outstanding for the effect of stock options during the year ended
December 31, 1998 since the stock options were anti-dilutive. Earnings are
defined as the net operating income and realized and unrealized gain (loss) on
investments and are reduced by the preferred stock dividend requirements of
PMCIC. Preferred stock dividend requirements were $251,000, $250,000 and
$250,000 during the years ended December 31, 2000, 1999 and 1998, respectively.

F-25



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Dividend Reinvestment and Cash Purchase Plan:

We have a dividend reinvestment and cash purchase plan (the Plan) for up to
1,000,000 shares of common stock. As amended, effective March 1998,
participants in the Plan have the option to reinvest all or a portion of
dividends received plus an optional cash purchase of up to $5,000 per month.
The optional cash portion of the plan was suspended during April, 1998. Since
April 1998, we have been using the open market to purchase shares with the
proceeds from the dividend reinvestment portion of the plan. Accordingly, when
we use the open market to purchase the shares we do not issue new shares or
receive the proceeds. As a result we had no share issuances pursuant to the
Plan during the years ended December 31, 2000 and 1999. During the year ended
December 31, 1998, we issued 198,329 shares of common stock pursuant to the
Plan for proceeds (through cash and the reinvestment of dividends) of
approximately $2.8 million.

Note 12. Profit Sharing Plan:

We have a profit sharing plan available to our full-time employees after one
year of employment. Vesting increases ratably to 100% after the sixth year of
employment. Pursuant to our profit sharing plan, $247,000, $243,000 and
$243,000, respectively, has been expensed during each of the years ended
December 31, 2000, 1999 and 1998. Contributions to the profit sharing plan are
at the discretion of our Board of Directors.

Note 13. Stock Based Compensation Plan:

We have two stock based compensation plans; the PMC Capital, Inc. 1997
Non-Employee Director Stock Option Plan and the PMC Capital, Inc. 1997 Employee
Stock Option Plan (collectively, the Option Plan). Under the Option Plan, we
are authorized to issue up to 6% of the then outstanding shares of Common Stock
pursuant to Awards granted as incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended) to
employees and non-qualified stock options to employees.

We apply Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Plan. In 1995, SFAS No. 123 Accounting for Stock-Based
compensation was issued which, if fully adopted by us would have changed the
methods we apply in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS No. 123 is optional and we did not elect these
provisions of SFAS No. 123. However, pro-forma disclosures (as if we adopted
the cost recognition provisions of SFAS No. 123) are required by SFAS No. 123
and are presented below.

Stock Options

We granted stock options during the years ended December 31, 2000, 1999 and
1998 to certain employees and directors. The stock options granted (1) all
have contractual terms of five years, (2) have an exercise price equal to the
fair market value of the stock at grant date, and. (3) vest 100% on the first
anniversary of the date of grant.

F-26



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of our stock options as of December 31, 2000, 1999 and
1998 and the changes during the years ended on those dates are as follows:

|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       |  |  |  |  | 
|-------------------------------------------------------------- |  | ---------- | ------- | -------- |  | ---------- | ----- | -------- |  | ---------- | ------- | -------- |  | - | ----- |  |  | - | ------- | - |  | - | ----- |  |  |  |  | 
|                                                               |  | 2000       |         | 1999     |  | 1998      
|                                                               |  |            |         |          |  |           
|                                                               |  | Number of  |         | Weighted |  | Number of  |       | Weighted |  | Number of  |         | Weighted
|                                                               |  | Shares     |         | Average  |  | Shares     |       | Average  |  | Shares     |         | Average 
|                                                               |  | Underlying |         | Exercise |  | Underlying |       | Exercise |  | Underlying |         | Exercise
|                                                               |  | Options    |         | Prices   |  | Options    |       | Prices   |  | Options    |         | Prices  
|                                                               |  |            |         |          |  |            |       |          |  |            |         |         
|Outstanding
at January 1                                       |  |            | 196,055 |          |  | $          | 12.15 |          |  |            | 134,855 |          |  | $ | 14.18 |  |  |   | 86,755  |   |  | $ | 14.21 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Granted                                                        |  |            | 66,800  |          |  | $          | 9.03  |          |  |            | 65,000  |          |  | $ | 8.04  |  |  |   | 56,000  |   |  | $ | 14.07 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Exercised                                                      |  |            | (24,400 | )        |  | $          | 8.06  |          |  |            |        |          |  |   |      |  |  |   |        |   |  |   |      | 
|                                                              
|                                                              
|                                                              
|                                                              
|Forfeited                                                      |  |            | (28,550 | )        |  | $          | 11.55 |          |  |            | (800    | )        |  | $ | 11.06 |  |  |   | (7,900  | ) |  | $ | 14.13 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Expired                                                        |  |            |        |          |  |            |      |          |  |            | (3,000  | )        |  | $ | 14.13 |  |  |   |        |   |  |   |      | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |         
|Outstanding
at December 31                                     |  |            | 209,905 |          |  | $          | 11.72 |          |  |            | 196,055 |          |  | $ | 12.15 |  |  |   | 134,855 |   |  | $ | 14.18 | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Exercisable
at December 31                                     |  |            | 150,605 |          |  | $          | 12.77 |          |  |            | 131,455 |          |  | $ | 14.16 |  |  |   | 86,455  |   |  | $ | 14.21 | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Weighted-average
fair value of
options granted
during the year |  | $          | 0.57    |          |  |            |       |          |  | $          | 0.35    |          |  |   |       |  |  | $ | 0.78    |  
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |  

The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants during the years ended December 31,
2000, 1999 and 1998:

|                        |  |  |  |  |  |      |       |   |  |  |  |      |  |  |       |   |  |      |  |  |  |  |       |  
|----------------------- |  |  |  |  |  | ---- | ----- | - |  |  |  | ---- |  |  | ----- | - |  | ---- |  |  |  |  | ----- | -
|Assumption              |  |  |  |  |  | 2000 |       |   |  |  |  | 1999 |  |  |       |   |  | 1998
|                        |  |  |  |  |  |      |       |   |  |  |  |      |  |  |       |   |  |     
|Expected Term (years)   |  |  |  |  |  |      | 3.0   |   |  |  |  |      |  |  | 3.0   |   |  |      |  |  |  |  | 3.0   |  
|                       
|                       
|                       
|                       
|Risk-Free Interest Rate |  |  |  |  |  |      | 6.40  | % |  |  |  |      |  |  | 5.81  | % |  |      |  |  |  |  | 5.55  | %
|                       
|                       
|                       
|                       
|Expected Dividend Yield |  |  |  |  |  |      | 11.03 | % |  |  |  |      |  |  | 12.43 | % |  |      |  |  |  |  | 8.80  | %
|                       
|                       
|                       
|                       
|Expected Volatility     |  |  |  |  |  |      | 19.78 | % |  |  |  |      |  |  | 18.36 | % |  |      |  |  |  |  | 15.63 | %

Pro-Forma Net Income and Earnings Per Common Share

Had the compensation cost for our stock-based compensation plans been
determined consistent with SFAS No. 123, our net income and earnings per common
share for the years ended December 31, 2000, 1999 and 1998 would approximate
the pro-forma amounts below (in thousands, except per share data):

|                                                  |  |                   |        |                   |  |                   |        |       |  |          |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                  |  | December 31, 2000 |        | December 31, 1999 |  | December 31, 1998
|                                                  |  |                   |        |                   |  |                  
|                                                  |  | As                |        | Pro-              |  | As                |        | Pro-  |  | As       |        | Pro- 
|                                                  |  | Reported          |        | Forma             |  | Reported          |        | Forma |  | Reported |        | Forma
|                                                  |  |                   |        |                   |  |                   |        |       |  |          |        |      
|SFAS No. 123 Charge                               |  | $                 |       |                   |  | $                 | 28     |       |  | $        |       |       |  | $ | 28     |  |  | $ |       |  |  | $ | 44     | 
|                                                 
|                                                 
|                                                 
|                                                 
|APB 25 Charge                                     |  | $                 |       |                   |  | $                 |       |       |  | $        |       |       |  | $ |       |  |  | $ |       |  |  | $ |       | 
|                                                 
|                                                 
|                                                 
|                                                 
|Net Income                                        |  | $                 | 11,253 |                   |  | $                 | 11,225 |       |  | $        | 13,420 |       |  | $ | 13,392 |  |  | $ | 13,949 |  |  | $ | 13,905 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Basic and Diluted
   Earnings Per
   Common Share |  | $                 | 0.93   |                   |  | $                 | 0.93   |       |  | $        | 1.11   |       |  | $ | 1.11   |  |  | $ | 1.16   |  |  | $ | 1.16   | 

F-27



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options outstanding at
December 31, 2000:

|                |                      |                     |          |             |              |           |    |         |       |             |   |          |      |  |  |         |         |  |   |       |       | 
|--------------- | -------------------- | ------------------- | -------- | ----------- | ------------ | --------- | -- | ------- | ----- | ----------- | - | -------- | ---- |  |  | ------- | ------- |  | - | ----- | ----- | 
|                |                      |                     |          | Number      |              |           |    |         |       | Weighted    |   | Number  
|                |                      |                     |          | Outstanding |              | Weighted  |    | Average |       | Exercisable |   | Weighted
|                |                      |                     |          | at          | Average      | Remaining | at | Average
|Range of        |                      | December 31,        | Exercise | Contractual | December 31, | Exercise 
|Exercise Prices |                      | 2000                |          | Price       |              | Life      |    | 2000    |       | Price      
|                |                      |                     |          |             |              |           |    |         |       |            
|                |                      | $7.8125 to $9.06    |          |             | 99,500       |           |    | $       | 9.02  |             |   | $        | 4.75 |  |  |         | 40,200  |  |   | $     | 8.78  | 
|               
|               
|               
|               
|                | $14.0625 to $14.3125 |                     |          | 110,405     |              |           | $  | 14.16   |       |             | $ | 1.81     |      |  |  | 110,405 |         |  | $ | 14.16 |      
|                |                      |                     |          |             |              |           |    |         |       |             |   |          |      | 
|                |                      | $7.8125 to $14.3125 |          |             | 209,905      |           |    | $       | 11.72 |             |   | $        | 3.27 |  |  |         | 150,605 |  |   | $     | 12.77 | 
|                |                      |                     |          |             |              |           |    |         |       |             |   |          |     

The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of future amounts.

Note 14. Related Party Transactions:

Pursuant to SBA rules and regulations, distributions from our wholly-owned
regulated investment company subsidiaries are limited. As of December 31, 2000
and 1999, the amounts of dividends available for distribution were
approximately $2.1 million and $2.0 million, respectively.

Pursuant to the investment management agreements entered into between PMC
Commercial and PMC Advisers, fees of between 0.40% and 1.67%, annually, are
charged by PMC Advisers based upon the average principal outstanding of PMC
Commercials loans. Commencing July 1, 2000, the highest rate charged was
reduced from 1.67% to 1.55%. In addition, the investment management agreement
includes compensation to PMC Advisers for (1) its assistance in the issuance of
PMC Commercials debt and equity securities, (2) providing services relating to
the supervision of leases entered into by PMC Commercial and, (3) the
acquisition by PMC Commercial of limited service hospitality properties. Fees
for the three years in the period ended December 31, 2000 were as follows:

|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  | Years Ended December 31,
|                                   |  |                         
|Type of Fee                        |  | 2000                     |       | 1999 |  | 1998
|                                   |  |                          |       |      |  |     
|                                   |  | (In thousands)          
|Loan servicing and origination fee |  | $                        | 1,599 |      |  | $    | 1,726 |  |  | $ | 1,789 | 
|                                  
|                                  
|                                  
|                                  
|Lease supervision                  |  |                          | 500   |      |  |      | 482   |  |  |   | 218   | 
|                                  
|                                  
|                                  
|                                  
|Structured financing               |  |                          | 100   |      |  |      |      |  |  |   | 167   | 
|                                  
|                                  
|                                  
|                                  
|Property acquisition               |  |                          |      |      |  |      | 81    |  |  |   | 466   | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|                                   |  | $                        | 2,199 |      |  | $    | 2,289 |  |  | $ | 2,640 | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 

PMC Capital allocates overhead to PMC Advisers to the extent that PMC Advisers
utilizes the staff and facilities of PMC Capital. The overhead allocated
during the years ended December 31, 2000, 1999 and 1998, was $1,701,000,
$1,747,000 and $2,470,000, respectively. These amounts are included in Other
income, net, on the accompanying consolidated statements of income. In no
event will the allocated expenses exceed the income available from the
operations of PMC Advisers.

Note 15. Commitments and Contingencies:

Operating Leases

During 1991, we entered into an agreement to lease our corporate office space
for a 15 year period from a corporation, a majority of whose principals are our
officers and directors. During September 1998, we exercised the option to
terminate the lease effective January 1, 1999.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 1998, we entered into a five-year lease for office space
commencing December 1998. We may at our option, renew the term of the lease
for two additional five-year periods. At December 31, 2000, we had additional
agreements to lease office space in Kansas City, Missouri, Phoenix, Arizona and
Atlanta, Georgia. Rental expense amounted to approximately $315,000, $286,000
and $244,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.

Future minimum lease payments at December 31, 2000 are as follows:

|             |        |   |         | 
|------------ | ------ | - | ------- | 
|Year Ending 
|December 31, | Amount
|             |        |  
|2001         |        | $ | 284,000 | 
|            
|            
|            
|            
|2002         |        |   | 284,000 | 
|            
|            
|            
|            
|2003         |        |   | 284,000 | 
|            
|            
|            
|            
|2004         |        |   | 24,000  | 
|             |        |   |         | 
|             |        | $ | 876,000 | 
|             |        |   |         | 

Loan Commitments

Loan commitments outstanding at December 31, 2000, including the unfunded
portion of projects in the construction phase, amounted to approximately $32.2
million. Of these commitments, $11.4 million are for loans to be originated by
First Western, a portion of which will be sold pursuant to SBA Guaranteed
Sales. These commitments are made in the ordinary course of our business and,
in managements opinion, are generally on the same terms as those to existing
borrowers. Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met. Commitments
generally have fixed expiration dates and require payment of a fee. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

Employment Agreements

We have employment contracts with certain of our officers and/or employees for
terms expiring June 2003. Annual remuneration during the term of the contracts
does not exceed $315,000 for any one individual. Future minimum payments under
these contracts are as follows:

|             |  |        |           | 
|------------ |  | ------ | --------- | 
|Year Ending 
|December 31, |  | Amount
|             |  |       
|2001         |  | $      | 1,185,000 | 
|            
|            
|            
|            
|2002         |  |        | 1,185,000 | 
|            
|            
|            
|            
|2003         |  |        | 592,000   | 
|             |  |        |           | 
|             |  | $      | 2,962,000 | 
|             |  |        |           | 

During the years ended December 31, 2000, 1999 and 1998 compensation to
officers was approximately $1.6 million, $1.7 million and $1.5 million,
respectively.

Litigation

In the normal course of business, we are subject to various proceedings and
claims, the resolution of which will not, in managements opinion, have a
material adverse effect on our consolidated financial position or results of
operations.

Note 16. Credit and Interest Rate Risk:

We have established a fundamental policy that requires investment of at least
25% of our total assets in the lodging industry, and allows investment of up to
100% of our total assets in this industry. At December 31, 2000 and 1999,
loans to businesses in the lodging industry comprised 53% and 55% of our total
assets,

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PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

respectively, and 85% and 86% of our loans receivable, net, respectively. Any
economic factors that negatively impact the lodging industry could have a
material adverse effect on our business. Additionally, at December 31, 2000,
loans to businesses located in Texas and Georgia comprised approximately 20%
and 15%, respectively, of our outstanding loan portfolio. A decline in
economic conditions in Texas or Georgia may have an adverse affect on us.

Our net income is affected by the spread between the rate at which we borrow
funds and the rate at which we loan these funds. A significant portion of the
portfolios of PMC Capital, Western Financial and PMCIC have typically been
long-term and at fixed rates of interest and the borrowed funds of these
companies are typically long-term and at fixed rates of interest. If the yield
on the loans we originated with funds obtained from borrowings or the issuance
of preferred stock fails to cover the cost of such funds, our cash flow will be
reduced. During periods of changing interest rates, interest rate mismatches
could negatively impact our net income, dividend yield and the market price of
our Common Stock. Most of the fixed-rate loans that we have originated have
prepayment penalties. If interest rates decline, we may experience significant
prepayments. Such prepayments, as well as scheduled repayments, are likely to
be re-loaned or invested at lower rates, which may have an adverse effect on
our ability to maintain dividend distributions at existing levels.

Note 17. Recent Accounting Pronouncements

In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 140 replaces SFAS
No. 125. SFAS No.
140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of SFAS No. 125s provisions without reconsideration.
The accounting provisions of SFAS No. 140 should be applied prospectively to
transfers of financial assets occurring after March 31, 2001 while the
disclosure requirements are required for financial statements with fiscal years
ending after December 15, 2000. We do not anticipate that the impact of SFAS
No. 140 will have a material effect on our consolidated financial statements.

In July 2000, EITF 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interest in Securitized Financial Assets
(EITF 99-20) was issued. EITF 99-20 provides guidance on interest income
recognition and measurement guidance for interests retained in a securitization
transaction accounted for as a sale and for purchased beneficial interests.
EITF 99-20 is effective for all fiscal quarters beginning after December 15,
2000. The impact of adoption of EITF 99-20 will not significantly impact our
consolidated financial statements.

Note 18. Subsequent Event

On March 14, 2001, the Board declared a dividend of $0.25 per share to
shareholders of record on March 31, 2001, payable in April 2001. In the
absence of unforeseen events, the Board has determined that the present level
of quarterly dividends will be adjusted commencing with the dividend payable in
July 2001. At that time, we anticipate that the quarterly dividend will be
reduced to a range between $0.18 per share and $0.22 per share.

F-30



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##### Table of Contents






Report of Independent Accountants
on Consolidating Financial Statements

To the Shareholders and Board of Directors
PMC Capital, Inc.:

The report on our audit of the consolidated financial statements of PMC Capital,
Inc. and its subsidiaries as of December 31, 2000 and for the year then ended
appears on page F-4 of this Form 10-K. That audit was conducted for the purpose
of forming an opinion on the consolidated financial statements taken as a whole.
The consolidating balance sheet and related consolidating statements of income,
cash flows and shareholders equity is presented for purposes of additional
analysis and is not a required part of the consolidated financial statements.
Such information has been subjected to the auditing procedures applied in the
audit of the consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the consolidated financial
statements taken as a whole.

PricewaterhouseCoopers LLP

March 2, 2001, except for Note 18, as
   to which the date is March 14, 2001

Dallas, Texas

F-31



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES






|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        | FIRST      |   | WESTERN
|--------------------------------------------- | ------------------------------------------------------------ | - | ------- | ------- | ------------ | - | ----------- | ------- | ----------- | - | ------- | ------- | ------------ | - | ------------ | ------ | ----------- | - | ------------- | ------ | ---------- | - | -------
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         | CONSOLIDATED |   |              |        |             |   | WESTERN SBLC, |        | FINANCIAL  |   | PMC    
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         | BEFORE       |   | PMC CAPITAL, |        | INC. AND    |   | CAPITAL       |        | INVESTMENT
|                                              |                                                              |   |         |         | CONSOLIDATED |   | ELIMINATION |         | ELIMINATION |   | INC.    |         | SUBSIDIARIES |   | CORPORATION  |        | CORPORATION
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |            
|ASSETS                                       
|                                             
|                                             
|                                             
|                                             
|Investments at value:                        
|                                             
|                                             
|                                             
|                                             
|                                              | Loans receivable, net                                        |   | $       | 100,353 |              |   | $           |        |             |   | $       | 100,353 |              |   | $            | 23,652 |             |   | $             | 16,279 |            |   | $      
|                                              | Retained interests in    transferred assets                  |   |         | 32,341  |              |   |             |        |             |   |         | 32,341  |              |   |              | 28,338 |             |   |               | 4,003  |            |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | Cash equivalents                                             |   |         | 21,655  |              |   |             |        |             |   |         | 21,655  |              |   |              | 18,385 |             |   |               | 1,276  |            |   |        
|                                              | Mortgage-backed security    of affiliate                     |   |         | 1,841   |              |   |             |        |             |   |         | 1,841   |              |   |              | 1,841  |             |   |               |       |            |   |        
|                                              | Restricted investments                                       |   |         | 177     |              |   |             |        |             |   |         | 177     |              |   |              |       |             |   |               | 177    |            |   |        
|                                              | Investment in subsidiaries                                   |   |         | 148     |              |   |             | (23,470 | )           |   |         | 23,618  |              |   |              | 23,618 |             |   |               |       |            |   |        
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total investments                             |                                                              |   | 156,515 |         |              |   | (23,470     | )       |             |   | 179,985 |         |              |   | 95,834       |        |             |   | 21,735        |        |            |   | 18,810 
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Other assets:                                
|                                              | Due from unconsolidated    subsidiaries                      |   |         | 2,278   |              |   |             | (21,491 | )           |   |         | 23,769  |              |   |              | 23,749 |             |   |               |       |            |   |        
|                                              | Deferred charges, deposits    and other assets               |   |         | 938     |              |   |             |        |             |   |         | 938     |              |   |              | 253    |             |   |               | 113    |            |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | Receivable for loans sold                                    |   |         | 750     |              |   |             |        |             |   |         | 750     |              |   |              | 8      |             |   |               | 742    |            |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | Accrued interest receivable                                  |   |         | 579     |              |   |             |        |             |   |         | 579     |              |   |              | 142    |             |   |               | 85     |            |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | Cash                                                         |   |         | 254     |              |   |             |        |             |   |         | 254     |              |   |              | 171    |             |   |               | 66     |            |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | Property and equipment, net                                  |   |         | 164     |              |   |             |        |             |   |         | 164     |              |   |              | 164    |             |   |               |       |            |   |        
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total other assets                            |                                                              |   | 4,963   |         |              |   | (21,491     | )       |             |   | 26,454  |         |              |   | 24,487       |        |             |   | 1,006         |        |            |   | 382    
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total assets                                  |                                                              | $ | 161,478 |         |              | $ | (44,961     | )       |             | $ | 206,439 |         |              | $ | 120,321      |        |             | $ | 22,741        |        |            | $ | 19,192 
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|LIABILITIES ANDSHAREHOLDERS EQUITY          
|Liabilities:                                 
|                                             
|                                             
|                                             
|                                             
|                                              | Notes and debentures payable                                 |   | $       | 72,977  |              |   | $           |        |             |   | $       | 72,977  |              |   | $            | 41,667 |             |   | $             |       |            |   | $      
|                                             
|                                             
|                                             
|                                             
|                                              | Dividends payable                                            |   |         | 3,026   |              |   |             |        |             |   |         | 3,026   |              |   |              | 2,963  |             |   |               |       |            |   |        
|                                              | Borrower advances                                            |   |         | 1,549   |              |   |             |        |             |   |         | 1,549   |              |   |              | 631    |             |   |               | 413    |            |   |        
|                                              | Accrued interest payable                                     |   |         | 1,284   |              |   |             |        |             |   |         | 1,284   |              |   |              | 573    |             |   |               | 30     |            |   |        
|                                              | Accounts payable                                             |   |         | 1,088   |              |   |             |        |             |   |         | 1,088   |              |   |              | 127    |             |   |               | 955    |            |   |        
|                                              | Due to unconsolidated    subsidiaries                        |   |         | 667     |              |   |             | (21,491 | )           |   |         | 22,158  |              |   |              | 635    |             |   |               | 18,771 |            |   |        
|                                              | Other liabilities                                            |   |         | 1,220   |              |   |             |        |             |   |         | 1,220   |              |   |              | 1,058  |             |   |               | 115    |            |   |        
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total liabilities                             |                                                              |   | 81,811  |         |              |   | (21,491     | )       |             |   | 103,302 |         |              |   | 47,654       |        |             |   | 20,284        |        |            |   | 11,009 
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Cumulative preferred stock    of subsidiary   |                                                              |   | 7,000   |         |              |   | 3,000       |         |             |   | 4,000   |         |              |   |             |        |             |   |              |        |            |   |       
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Shareholders equity:                        
|                                              | Cumulative preferred stock of    subsidiary, 3%              |   |         |        |              |   |             | (3,000  | )           |   |         | 3,000   |              |   |              |       |             |   |               |       |            |   |        
|                                              | Common stock                                                 |   |         | 119     |              |   |             | (22     | )           |   |         | 141     |              |   |              | 119    |             |   |               |       |            |   |        
|                                              | Additional paid-in capital                                   |   |         | 71,508  |              |   |             | (22,373 | )           |   |         | 93,881  |              |   |              | 71,508 |             |   |               | 2,000  |            |   |        
|                                              | Undistributed net operating    income                        |   |         | 238     |              |   |             | (2,075  | )           |   |         | 2,313   |              |   |              | (230   | )           |   |               | 1,730  |            |   |        
|                                              | Net unrealized appreciation    (depreciation)
on investments |   |         | 802     |              |   |             |        |             |   |         | 802     |              |   |              | 1,270  |             |   |               | (273   | )          |   |        
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|                                              |                                                              |   | 72,667  |         |              |   | (27,470     | )       |             |   | 100,137 |         |              |   | 72,667       |        |             |   | 3,457         |        |            |   | 8,183  
|                                              | Less treasury stock                                          |   |         |        |              |   |             | 1,000   |             |   |         | (1,000  | )            |   |              |       |             |   |               | (1,000 | )          |   |        
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total shareholders equity                    |                                                              |   | 72,667  |         |              |   | (26,470     | )       |             |   | 99,137  |         |              |   | 72,667       |        |             |   | 2,457         |        |            |   | 8,183  
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Total liabilities and shareholders    equity |                                                              | $ | 161,478 |         |              | $ | (44,961     | )       |             | $ | 206,439 |         |              | $ | 120,321      |        |             | $ | 22,741        |        |            | $ | 19,192 
|                                              |                                                              |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |        
|Net asset value per common share              |                                                              | $ | 6.13   
|                                              |                                                              |   |         |        

The accompanying notes are an integral part of
these consolidating financial statements.

F-32



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       | FIRST      |      | WESTERN
|----------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------------------------------- | ------ | ------------ | --- | ----------- | ------ | ----------- | - | ---- | ------ | ------------ | --- | ------------ | ------ | ----------- | ----- | ------------- | ----- | ---------- | ---- | -------
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        | CONSOLIDATED |     |              |        |             |       | WESTERN SBLC, |       | FINANCIAL  |      | PMC    
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        | BEFORE       |     | PMC CAPITAL, |        | INC. AND    |       | CAPITAL       |       | INVESTMENT
|                                                                              |                                                       |                                                                   |        | CONSOLIDATED |     | ELIMINATION |        | ELIMINATION |   | INC. |        | SUBSIDIARIES |     | CORPORATION  |        | CORPORATION
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |            
|Investment income:                                                           
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Interest                                              |                                                                   | $      | 13,540       |     |             | $      |            |   |      | $      | 13,540       |     |              | $      | 4,559       |       |               | $     | 2,551      |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income from retained
interests  in transferred assets |                                                                   |        | 4,020        |     |             |        |             |   |      |        | 4,020        |     |              |        | 3,435       |       |               |       | 585        |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Premium income                                        |                                                                   |        | 573          |     |             |        |            |   |      |        | 573          |     |              |        | 318         |       |               |       | 255        |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Other investment income, net                          |                                                                   |        | 823          |     |             |        |            |   |      |        | 823          |     |              |        | 497         |       |               |       | 67         |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Total investment income                                                       |                                                       |                                                                   | 18,956 |              |     |             |       |             |   |      | 18,956 |              |     |              | 8,809  |             |       |               | 3,458 |            |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other income, net                                                             |                                                       |                                                                   | 2,148  |              |     |             |       |             |   |      | 2,148  |              |     |              | 1,801  |             |       |               | 129   |            |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Equity in income (loss) of subsidiaries                                       |                                                       |                                                                   | 480    |              |     |             | (7,403 | )           |   |      | 7,883  |              |     |              | 7,883  |             |       |               |      |            |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Total income                                                                  |                                                       |                                                                   | 21,584 |              |     |             | (7,403 | )           |   |      | 28,987 |              |     |              | 18,493 |             |       |               | 3,587 |            |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Expense:                                                                     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Interest                                              |                                                                   |        | 5,383        |     |             |        |            |   |      |        | 5,383        |     |              |        | 3,135       |       |               |       | 18         |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Salaries and related benefits                         |                                                                   |        | 4,182        |     |             |        |            |   |      |        | 4,182        |     |              |        | 4,182       |       |               |       |           |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | General and administrative                            |                                                                   |        | 750          |     |             |        |            |   |      |        | 750          |     |              |        | 674         |       |               |       | 44         |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Rent                                                  |                                                                   |        | 315          |     |             |        |            |   |      |        | 315          |     |              |        | 315         |       |               |       |           |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Legal and accounting                                  |                                                                   |        | 260          |     |             |        |            |   |      |        | 260          |     |              |        | 256         |       |               |       |           |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Profit sharing plan                                   |                                                                   |        | 247          |     |             |        |            |   |      |        | 247          |     |              |        | 247         |       |               |       |           |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Small Business Administration fees                    |                                                                   |        | 86           |     |             |        |            |   |      |        | 86           |     |              |        |            |       |               |       | 1          |      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Directors and shareholders expense                    |                                                                   |        | 57           |     |             |        |            |   |      |        | 57           |     |              |        | 55          |       |               |       | 2          |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Total expense                                                                 |                                                       |                                                                   | 11,280 |              |     |             |       |             |   |      | 11,280 |              |     |              | 8,864  |             |       |               | 65    |            |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Net operating income                                                          |                                                       |                                                                   | 10,304 |              |     |             | (7,403 | )           |   |      | 17,707 |              |     |              | 9,629  |             |       |               | 3,522 |            |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Realized and unrealized gain  (loss) on investments:                         
|                                                                              |                                                       | Investments written-off                                           |        |              | (17 | )           |        |             |  |      |        |              | (17 | )            |        |             |      |               |       |            | (17  | )      
|                                                                              |                                                       | Sale of assets                                                    |        |              | 564 |             |        |             |  |      |        |              | 564 |              |        |             | 564   |               |       |            |     |        
|                                                                              |                                                       | Change in unrealized appreciation  
(depreciation) on investments |        |              | 402 |             |        |             |  |      |        |              | 402 |              |        |             | 1,060 |               |       |            | (536 | )      
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Total realized and
unrealized gain  (loss) on investments                     |                                                       |                                                                   | 949    |              |     |             |       |             |   |      | 949    |              |     |              | 1,624  |             |       |               | (553  | )          |      |        
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Net operating income and realized  and unrealized
gain (loss) on  investments |                                                       | $                                                                 | 11,253 |              |     | $           | (7,403 | )           |   | $    | 18,656 |              |     | $            | 11,253 |             |       | $             | 2,969 |            |      | $      
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Preferred dividends                                                           |                                                       | $                                                                 | 251    |              |     | $           | (251   | )           |   | $    | 502    |              |     | $            | 251    |             |       | $             |      |            |      | $      
|                                                                              |                                                       |                                                                   |        |              |     |             |        |             |   |      |        |              |     |              |        |             |       |               |       |            |      |        
|Basic and diluted earnings per share                                          |                                                       | $                                                                 | 0.93   |             
|                                                                              |                                                       |                                                                   |        |             

The accompanying notes are an integral part of
these consolidating financial statements.

F-33



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |         |  
|----------------------------------------- | ---------------------------------------------------------------------- | - | --------- | ------ | ------ | - | ------- | --- | ------------- | - | -------------- | ------- | ------------- | - | ------------- | ------- | - | - | ---------- | ----- | ----- | - | ----- | ------ | - | - | ------- | ------- | -
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   | Net       
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   | Unrealized
|                                          |                                                                        |   |           |        |        |   |         |     |               |   | Additional     |         | Undistributed |   | Appreciation  |         |   |   |            |       | Total
|                                          |                                                                        |   | Preferred |        | Common |   | Paid-in |     | Net Operating |   | (Depreciation) |         | Treasury      |   | Shareholders'
|                                          |                                                                        |   | Stock, 3% |        | Stock  |   | Capital |     | Income        |   | on Investments |         | Stock         |   | Equity       
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |              
|PMC CAPITAL, INC.                        
|                                         
|                                         
|                                         
|                                         
|                                          | Balances, January 1, 2000                                              |   | $         |       |        |   | $       | 118 |               |   | $              | 71,312  |               |   | $             | 1,674   |   |   | $          | 210   |       |   | $     |       |   |   | $       | 73,314  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                                                             |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 10,193  |   |   |            | 1,060 |       |   |       |       |   |   |         | 11,253  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Preferred dividend of consolidated subsidiary                          |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (251    | ) |   |            |      |       |   |       |       |   |   |         | (251    | )
|                                         
|                                         
|                                         
|                                         
|                                          | Issuances of common stock pursuant
to stock option plan, 24,400 shares |   |           |       |        |   |         | 1   |               |   |                | 196     |               |   |               |        |   |   |            |      |       |   |       |       |   |   |         | 197     |  
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends on common stock                                              |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (11,846 | ) |   |            |      |       |   |       |       |   |   |         | (11,846 | )
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|                                          | Balances, December 31, 2000                                            |   | $         |       |        |   | $       | 119 |               |   | $              | 71,508  |               |   | $             | (230    | ) |   | $          | 1,270 |       |   | $     |       |   |   | $       | 72,667  |  
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|FIRST WESTERN SBLC, INC.
AND SUBSIDIARIES
|                                         
|                                         
|                                         
|                                         
|                                          | Balances, January 1, 2000                                              |   | $         |       |        |   | $       |    |               |   | $              | 2,000   |               |   | $             | 1,125   |   |   | $          | 263   |       |   | $     | (1,000 | ) |   | $       | 2,388   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                                                             |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 3,505   |   |   |            | (536  | )     |   |       |       |   |   |         | 2,969   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends to parent company                                            |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (2,900  | ) |   |            |      |       |   |       |       |   |   |         | (2,900  | )
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|                                          | Balances, December 31, 2000                                            |   | $         |       |        |   | $       |    |               |   | $              | 2,000   |               |   | $             | 1,730   |   |   | $          | (273  | )     |   | $     | (1,000 | ) |   | $       | 2,457   |  
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|WESTERN FINANCIAL CAPITAL
CORPORATION    
|                                         
|                                         
|                                         
|                                         
|                                          | Balances, January 1, 2000                                              |   | $         |       |        |   | $       | 21  |               |   | $              | 7,934   |               |   | $             | 269     |   |   | $          | (20   | )     |   | $     |       |   |   | $       | 8,204   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                                                             |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 1,102   |   |   |            | (13   | )     |   |       |       |   |   |         | 1,089   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends to parent company                                            |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (1,110  | ) |   |            |      |       |   |       |       |   |   |         | (1,110  | )
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|                                          | Balances, December 31, 2000                                            |   | $         |       |        |   | $       | 21  |               |   | $              | 7,934   |               |   | $             | 261     |   |   | $          | (33   | )     |   | $     |       |   |   | $       | 8,183   |  
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|PMC INVESTMENT CORPORATION               
|                                         
|                                         
|                                         
|                                         
|                                          | Balances, January 1, 2000                                              |   | $         | 3,000  |        |   | $       | 1   |               |   | $              | 12,439  |               |   | $             | 432     |   |   | $          | (53   | )     |   | $     |       |   |   | $       | 15,819  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                                                             |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 3,454   |   |   |            | (109  | )     |   |       |       |   |   |         | 3,345   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends to parent company                                            |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (3,083  | ) |   |            |      |       |   |       |       |   |   |         | (3,083  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends, preferred                                                   |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (251    | ) |   |            |      |       |   |       |       |   |   |         | (251    | )
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|                                          | Balances, December 31, 2000                                            |   | $         | 3,000  |        |   | $       | 1   |               |   | $              | 12,439  |               |   | $             | 552     |   |   | $          | (162  | )     |   | $     |       |   |   | $       | 15,830  |  
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|ELIMINATION ADJUSTMENTS                  
|                                         
|                                         
|                                         
|                                         
|                                          | Equity in income of subsidiaries                                       |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (7,403  | ) |   |            |      |       |   |       |       |   |   |         | (7,403  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends to parent                                                    |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 7,093   |   |   |            |      |       |   |       |       |   |   |         | 7,093   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Preferred dividend of consolidated subsidiary                          |   |           |       |        |   |         |    |               |   |                |        |               |   |               | 251     |   |   |            |      |       |   |       |       |   |   |         | 251     |  
|                                         
|                                         
|                                         
|                                         
|                                          | Stock of subsidiaries                                                  |   |           | (3,000 | )      |   |         | (22 | )             |   |                | (22,373 | )             |   |               |        |   |   |            |      |       |   |       | 1,000  |   |   |         | (24,395 | )
|                                         
|                                         
|                                         
|                                         
|                                          | Undistributed earnings of subsidiaries                                 |   |           |       |        |   |         |    |               |   |                |        |               |   |               | (2,016  | ) |   |            |      |       |   |       |       |   |   |         | (2,016  | )
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|                                          |                                                                        |   | (3,000    | )      |        |   | (22     | )   |               |   | (22,373        | )       |               |   | (2,075        | )       |   |   |           |       |       |   | 1,000 |        |   |   | (26,470 | )      
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        
|CONSOLIDATED                              |                                                                        | $ |          |        |        | $ | 119     |     |               | $ | 71,508         |         |               | $ | 238           |         |   | $ | 802        |       |       | $ |      |        |   | $ | 72,667  |        
|                                          |                                                                        |   |           |        |        |   |         |     |               |   |                |         |               |   |               |         |   |   |            |       |       |   |       |        |   |   |         |        

The accompanying notes are an integral part of
these consolidating financial statements.

F-34



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES






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|
|
|
|
|

The accompanying notes are an integral part of
these consolidating financial statements.

F-35



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##### Table of Contents






EXHIBITS

|        |  |                                                                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                         
|3.1     |  | Articles of Incorporation, as amended (incorporated by
reference to Exhibit 4(b)(1) to Amendment No. 9 to the
Registration Statement on Form N-2 (Registration No.
33-2535) (the N-2 Registration Statement), dated
November 29, 1991.
|       
|       
|       
|       
|3.2     |  | By-Laws, as amended (incorporated by reference to
Exhibit 2 to Amendment No.7 to the N-2 Registration
Statement dated April 27, 1989).                                                                                                  
|       
|       
|       
|       
|4.1     |  | Certificate of Common Stock (incorporated by reference
to Exhibit 4 to Amendment No. 1 to the N-2 Registration
Statement dated November 10, 1993).                                                                                      
|       
|       
|       
|       
|4.2     |  | Debenture dated September 24, 1996 for $2,490,000 loan
with SBA. (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1996).                                                                   
|       
|       
|       
|       
|4.13    |  | Debenture dated September 28, 1994 for $3,000,000
loan with SBA (incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 1994).                                                                    
|       
|       
|       
|       
|4.14    |  | Debenture dated September 28, 1994 for $3,000,000
loan with SBA (incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 1994).                                                                    
|       
|       
|       
|       
|4.15    |  | Senior Note dated July 19, 1993 for $6,000,000 with
Columbine Life Insurance Company
(incorporated by reference from Registrants
Form 10-K for the fiscal year ended December
31, 1994).                                               
|       
|       
|       
|       
|4.16    |  | Senior Note dated July 19, 1993 for $9,000,000 with
Life Insurance Company of Georgia
(incorporated by reference from Registrants
Form 10-K for the fiscal year ended December
31, 1994).                                              
|       
|       
|       
|       
|4.17    |  | Senior Note dated July 19, 1993 for $5,000,000 with
Southland Life Insurance Company
(incorporated by reference from Registrants
Form 10-K for the fiscal year ended December
31, 1994).                                               
|       
|       
|       
|       
|4.18    |  | Senior Note dated December 15, 1993 for $2,000,000
with Peerless Insurance Company
(incorporated by reference from Registrants
Form 10-K for the fiscal year ended December
31, 1994).                                                 
|       
|       
|       
|       
|4.19    |  | Senior Note dated December 15, 1993 for $3,000,000
with Security Life of Denver Insurance
Company (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1994).                                  

E-1



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##### Table of Contents



|        |  |                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                        
|       
|       
|       
|       
|4.20    |  | Debenture dated March 29, 1995 for $3,000,000
loan with SBA (incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                       
|       
|       
|       
|       
|4.21    |  | Debenture dated June 28, 1995 for $5,000,000
loan with SBA (incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                        
|       
|       
|       
|       
|4.22    |  | Debenture dated September 27, 1995 for $7,000,000
loan with SBA. . (Incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                
|       
|       
|       
|       
|4.26    |  | Debenture dated December 6, 1992 for $510,000 loan
with SBA assumed from J & D Capital
Corporation (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1995).
|       
|       
|       
|       
|4.27    |  | Senior Note dated April 19, 1995 for $5,000,000
with Security Life of Denver Insurance
Company (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1995).    
|       
|       
|       
|       
|4.28    |  | Senior Note dated April 19, 1995 for
$2,000,000
with Peerless Insurance Company
(incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1995).                   
|       
|       
|       
|       
|4.29    |  | Senior Note dated April 19, 1995 for $2,000,000
with Indiana Insurance Company
(incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1995).                    
|       
|       
|       
|       
|4.30    |  | Senior Note dated April 19, 1995 for $1,000,000
with Security Life of Denver Insurance
Company (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1995).    
|       
|       
|       
|       
|4.32    |  | Senior Note dated July 19, 1999 for $10,000,000
with Equitable Life Insurance Company of
Iowa (incorporated by reference from
Registrants Form 10-K for the fiscal year
ended December 31, 1999).     
|       
|       
|       
|       
|*4.33   |  | Senior Note dated July 19, 2000 for $10,000,000
with Equitable Life Insurance Company of Iowa.                                                                                                         
|       
|       
|       
|       
|*4.34   |  | Debenture dated September 27, 2000 for $4,310,000
loan with SBA.                                                                                                                                       
|       
|       
|       
|       
|*4.35   |  | Debenture dated September 27, 2000 for $3,000,000
loan with SBA.                                                                                                                                       
|       
|       
|       
|       
|*10.1   |  | Employment contract between the Registrant and
Lance B. Rosemore dated July 1, 2000.                                                                                                                   

E-2



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|*10.2   |  | Employment contract between the Registrant and
Andrew S. Rosemore dated July 1, 2000.                                                                                                                                                                                      
|       
|       
|       
|       
|*10.4   |  | Employment contract between the Registrant and
Jan F. Salit dated July 1, 2000.                                                                                                                                                                                            
|       
|       
|       
|       
|*10.5   |  | Employment contract between the Registrant and
Barry N. Berlin dated July 1, 2000.                                                                                                                                                                                         
|       
|       
|       
|       
|*10.6   |  | Employment contract between the Registrant and
Mary J. Brownmiller dated July 1, 2000.                                                                                                                                                                                     
|       
|       
|       
|       
|*10.7   |  | Revolving Credit Facility dated March 22, 2000.                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.8    |  | Servicing Agreement by and among Sun Trust
Bank, PMC Capital Limited Partnership and PMC
Capital, Inc. (incorporated by reference from
Registrants Form 10-K for the fiscal year ended
December 31, 1996).                                                                
|       
|       
|       
|       
|10.9    |  | PMC Capital, Inc. 1997 Non-Employee Stock
Option Plan (incorporated by reference from
Registrants Form 10-K for the fiscal year ended
December 31, 1997).                                                                                                                 
|       
|       
|       
|       
|10.10   |  | PMC Capital, Inc. 1997 Employee Stock
Option Plan. (incorporated by reference from
Registrants Form 10-K for the fiscal year ended
December 31, 1996).                                                                                                                    
|       
|       
|       
|       
|*10.11  |  | Employment contract between the Registrant and
Cheryl T. Murray dated July 1, 2000.                                                                                                                                                                                        
|       
|       
|       
|       
|10.12   |  | Servicing Agreement by and among Harris
Trust savings Bank,as Trustee and Supervisory
Servicer, PMC Capital L.P. 1998-1, as Issuer, and
PMC Capital, Inc., as Servicer (incorporated by
reference from Registrants Form 10-K for the
fiscal year ended December 31, 1998).
|       
|       
|       
|       
|10.13   |  | Second Amendment to Loan Agreement and
Amendment to Loan Documents and Renewal and
Extension of loan dated as of March 15, 1998
(incorporated by reference from Registrants Form
10-Q for the quarterly period ended March 31, 1998)                                      

E-3



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|10.14   |  | Servicing Agreement by and among Harris
Trust Savings Bank, as Trustee and Supervisory
Servicer, PMC Capital L.P. 1999-1, as Issuer, and
PMC Capital, Inc., as Servicer. (incorporated by
reference from Registrants Form 10-Q for the
quarterly period ended June 30, 1999).
|       
|       
|       
|       
|10.15   |  | Trust Indenture between PMC Joint Venture,
L.P. 2000 and BNY Midwest Trust Company, dated as
of December 15, 2000. (incorporated by reference
from Registrants Form 8-K filed on March 13,
2001).                                                                            
|       
|       
|       
|       
|10.16   |  | Servicing Agreement by and among BNY
Midwest Trust Company, PMC Joint Venture, L.P. 2000
and PMC Capital and PMC Commercial Trust, dated as
of December 15, 2000 (incorporated by reference
from Registrants Form 8-K filed on March 13,
2001).                              
|       
|       
|       
|       
|*21     |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                    



---

|* |  | Filed herewith
|- |  | --------------

E-4