<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 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, 1996

          [ ] 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                     (I.R.S. Employer
    incorporation or organization)                    Identification No.)

17290 PRESTON ROAD, 3RD FLOOR, DALLAS, TX 75252         (972) 380-0044
 (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 February
28, 1997 as reported on the American Stock Exchange, was approximately $118
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 February 28, 1997, the Registrant had 11,249,343 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 14,
1997 are incorporated by reference into Part III.







<PAGE>   2



                                PMC CAPITAL, INC
                                   FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1996

            --------------------------------------------------------


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                          Form
                                                                          10-K
                                                                          Report
 Item                                                                     Page
 ----                                                                     ----
<S>      <C>                                                              <C>
                                     PART I

   1.    Business.....................................................    1
   2.    Properties...................................................    8
   3.    Legal Proceedings............................................    8
   4.    Submission of Matters to a Vote of Security Holders..........    8

                                    PART II

   5.    Market for the Registrant's  Common Stock and Related
              Shareholder Matters.....................................    9
   6.    Selected Consolidated Financial Data.........................   10
   7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations...............................   11
   8.    Consolidated Financial Statements and Supplementary Data.....   18
   9.    Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure................................   18

                                    PART III

  10.    Directors and Executive Officers of the Registrant...........   19
  11.    Executive Compensation.......................................   19
  12.    Security Ownership of Certain Beneficial Owners and
              Management..............................................   19
  13.    Certain Relationships and Related Transactions...............   19

                                    PART IV

  14.    Exhibits, Financial Statements, Schedules and Reports
              on Form 8-K.............................................   20
  Signatures..........................................................   21
  Financial Statements................................................  F-1
  Exhibits............................................................  E-1
</TABLE>




<PAGE>   3
                                     PART I

ITEM 1.       BUSINESS

GENERAL

         PMC Capital, Inc. ("PMC Capital" or "PMC" and, together with its
subsidiaries, the "Company") 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"). The common stock
of the Company (the "Common Stock") is traded on the American Stock Exchange
under the symbol "PMC." The Company engages in the business of originating
loans to small businesses either directly or through its three principal
subsidiaries: First Western SBLC, Inc. ("First Western"), PMC Investment
Corporation ("PMIC") and Western Financial Capital Corporation ("Western
Financial"). First Western, PMIC 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 PMC Advisers, LTD ("PMC Advisers"), PMC Funding Corp. ("PMC
Funding"), PMC Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A,
and PMC Capital Limited Partnership (the "Partnership"). PMC Advisers is an
investment advisor who evaluates and services loans pursuant to a fee
arrangement. PMC Capital has elected to be taxed as a regulated investment
company and distributes substantially all its taxable income as dividends to
its shareholders, thereby incurring no Federal income tax liability on such
income.

         The Company primarily originates loans to individuals and small
business concerns in the lodging industry. The Company also targets the medical,
food service, service, retail and commercial real estate industries. The Company
primarily lends to businesses in the Southwest and Southeast regions of the
United States. A majority of the Company's loans in the lodging industry are to
owner-operated facilities generally operating under national franchises. The
Company believes that franchise operations offer attractive lending
opportunities because such businesses employ proven business concepts, have
consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses. In addition, management believes that the franchise lodging
industry and the other industry segments upon which it focuses are underserved
by traditional lending sources.

         PMC Capital, incorporated in Florida under the name of Pro-Med
Capital, Inc. in June 1983, became the successor by merger to Western Capital
Corporation (founded in 1979) in December 1983 and changed its name to "PMC
Capital, Inc." in March 1991. The principal executive offices of the Company
are located at 17290 Preston Road, Third Floor, Dallas, Texas 75252.

         Earnings per share on a quarterly basis since 1988 were as follows:

<TABLE>
<CAPTION>
                                                 Per Share Earnings
                       ----------------------------------------------------------------------
                        1996    1995    1994     1993    1992    1991    1990    1989    1988
                       -----   -----   -----    -----   -----   -----   -----   -----   -----
<S>                    <C>     <C>     <C>      <C>     <C>     <C>     <C>     <C>     <C>  
First Quarter ......   $0.27   $0.23   $0.19    $0.18   $0.18   $0.15   $0.13   $0.09   $0.09
Second Quarter .....    0.30    0.25    0.23     0.23    0.23    0.15    0.12    0.11    0.09
Third Quarter ......    0.30    0.27    0.26     0.25    0.19    0.18    0.13    0.10    0.10
Fourth Quarter .....    0.31    0.28    0.44*    0.21    0.19    0.16    0.14    0.11    0.09
                       -----   -----   -----    -----   -----   -----   -----   -----   -----
                       $1.18   $1.03   $1.12    $0.87   $0.79   $0.64   $0.52   $0.41   $0.37
                       =====   =====   =====    =====   =====   =====   =====   =====   =====
</TABLE>

* Includes $0.24 from a structured sale of a portion of the loan portfolio.

LENDING PROGRAMS

         FIRST WESTERN

         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 7(a) Program (the "7(a)
Program"). While the eligibility requirements of the 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 (other than with



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respect to certain industries where eligibility is determined based on a number
of employees), (ii) liquid assets or real estate equity of the borrower (and
certain affiliates) cannot exceed certain limits and (iii) the maximum
aggregate SBA loan guarantees to a borrower cannot exceed $750,000.

         The interest rate environment and legislative changes have affected
the secondary market for the 7(a) Program guaranteed portion of loans
originated by First Western. 7(a) Program lenders are required to pay a fee of
between 40 basis points and 50 basis points ("SBA Servicing Fees") per annum on
the outstanding principal balance of any loans sold in the secondary market
depending upon when the loan was sold. At present, a 50 basis point fee is in
effect for loans originated after October, 1995. The value of the guaranteed
portion of loans decreased as a result of this fee. Additionally, as interest
rates fluctuated during 1994, the secondary market demand for the guaranteed
portion of the 7(a) Program loans decreased and the premiums declined. The
secondary market demand increased in late 1994, continued the increase during
1995 and stabilized during 1996, partially offsetting the negative effect of
the SBA Servicing Fees established in 1993.

         Effective October 1995, the fees charged to the borrower by the SBA
for the SBA's guaranty of a loan to the lender increased, are now based on the
size of the originated loan, and range from 2% to 3.875% of the guaranteed
portion of the loan. The fees had been 2% of the guaranteed portion of the
loan. First Western had a decrease in loan origination volume during 1996
partially as a result of these increased fees and an increase in competition.
Due to the decrease in loan origination volume, the premiums recognized from
the sale of the government guaranteed portion of SBA 7(a) loans sold in the
secondary market decreased from $2.8 million in 1995 to $1.9 million during
1996.

         Effective March 1, 1996, certain eligibility requirements of the 7(a)
Program were amended. As a result of these amendments and the other factors
described above, First Western has experienced a reduction in loan origination
opportunities within the 7(a) Program. The following are the modifications to
the program:

Eligibility requirement modifications. When the total amount of the proposed
financing:

         (a)     Is $250,000 or less, each 20 percent owner of the applicant
                 must contribute to the business personal liquid assets per the
                 SBA rules and regulations ("Personal Liquid Assets") in excess
                 of two times the total financing or $100,000, whichever is
                 greater;

         (b)     Is between $250,001 and $500,000, each 20 percent owner of the
                 applicant must contribute Personal Liquid Assets to the
                 business in excess of one and one-half times the total
                 financing or $500,000, whichever is greater; and

         (c)     Exceeds $500,000, each 20 percent owner of the applicant must
                 contribute to the business Personal Liquid Assets in excess of
                 one times the total financing or $750,000, whichever is
                 greater.

         Continued program and market changes may have an adverse effect on
future periods of operations. The future profitability of the Company's 7(a)
Program lending activities will be impacted by a number of factors including:
(i) the more efficient capital structure achieved by First Western's 1994
securitization and future potential securitizations, (ii) volume of lending,
(iii) length of loans, (iv) structure of sales to the secondary market, (v)
interest rates charged and related terms, (vi) quality of portfolio, (vii)
prepayment experience and (viii) legislative and/or regulatory changes.

         Any other aspect of SBA programs under which the Company participates
could be modified by legislation or agency policy changes. PMC Capital
continues to evaluate alternative lending strategies and would pursue such
strategies should the SBA programs under which any of its subsidiaries operates
were to be eliminated or significantly curtailed.

         At December 31, 1996 and 1995, First Western had outstanding loans
receivable, net, in an aggregate amount of $26.3 million and $20.8 million,
respectively. During the years ended December 31, 1996 and 1995, First Western
originated $29.2 million and $40.6 million, respectively, in loans and sold
$20.0 million and $30.3 million, respectively, of the guaranteed portion of its
loans into the secondary market (without recourse to the Company). At December
31, 1996 and 1995, First Western had loans receivable with aggregate balances
of approximately $412,000 and $659,000 (1.6% and 3.2%, respectively, of First
Western's outstanding loans receivable, net) greater than 60 days past due.
Realized and unrealized losses on First Western's investments were $56,000 and
$238,000 during the years ended December 31, 1996 and 1995, respectively.




                                       2

<PAGE>   5


         PMIC

         PMIC is a licensed specialized small business investment company
("SSBIC") under the Small Business Investment Act of 1958, as amended ("SBIA").
PMIC uses long-term funds provided by the SBA, together with its own capital,
to provide long-term, fixed-rate collateralized loans to eligible small
businesses owned by "disadvantaged" persons, as defined under the regulations
of the SBA. As an SBIC, PMIC is eligible to obtain long-term, fixed-rate
funding from the SBA through the issuance of Debentures which are guaranteed by
the SBA. For any Debentures issued by PMIC prior to 1996, the interest rate has
been reduced through an SBA subsidy by 3% during the first five years. As an
SSBIC, prior to 1996 PMIC was eligible to issue preferred stock to the SBA with
either a 3% or 4% per annum cumulative dividend rate. Issuance of Debentures is
subject to SBA approval and availability. See "Overview of SBA Regulations."

         At December 31, 1996 and 1995, PMIC had loans receivable, net, in an
aggregate amount of $ 28.6 million and $36.7 million, respectively. During the
years ended December 31, 1996 and 1995, PMIC originated $19.3 million and $21.2
million, respectively, in loans and during the year ended December 31, 1996
transferred $24.8 million in loans to PMC Capital in conjunction with a
structured financing (the "Structured Financing"). At December 31, 1996 and
1995, PMIC had loans receivable with aggregate balances of approximately
$160,000 and $707,000 (0.8% and 2.0%, respectively, of PMIC's loans receivable,
net) greater than 60 days past due. Realized and unrealized losses on PMIC's
investments were $27,000 during each of the years ended December 31, 1996 and
1995.

         WESTERN FINANCIAL

         Western Financial is a licensed small business investment company
("SBIC") under the SBIA that provides fixed-rate loans to small business
concerns and persons whether or not they qualify as "disadvantaged." As an
SBIC, Western Financial is eligible to obtain long-term, fixed-rate funding
from the SBA through the issuance of Debentures. Issuance of Debentures is
subject to SBA approval and availability.  See "Overview of SBA Regulations."

         At December 31, 1996 and 1995, Western Financial had loans receivable,
net, in an aggregate amount of $14.4 million and $25.1 million, respectively.
During the years ended December 31, 1996 and 1995, Western Financial originated
$7.5 million and $8.0 million, respectively, in loans and during the year ended
December 31, 1996 transferred $10.0 million in loans to PMC Capital in
conjunction with the Structured Financing. At December 31, 1996 and 1995,
Western Financial had loans receivable with aggregate principal balances of
approximately $215,000 and $436,000 (1.5% and 1.7%, respectively, of Western
Financial's loans receivable, net) greater than 60 days past due. Realized and
unrealized losses on Western Financial's investments were $64,000 and $94,000,
respectively, during the years ended December 31, 1996 and 1995.

         PMC CAPITAL

         PMC Capital has originated loans to borrowers on a non-SBA supported
basis using criteria similar to that utilized by its three principal investment
company subsidiaries whose loans are funded under the SBA programs. These loans
are: (i) to borrowers who exceed the eligibility requirements of the 7(a)
Program or SBIC programs, (ii) payable in monthly installments of principal and
interest based upon four to 25 year amortization tables, with the balance due
at maturity (typically four to 20 years), (iii) primarily collateralized by
real estate and (iv) generally guaranteed by the principals of the borrowers.
The funding for this lending program is limited to the extent of leverage
available to PMC Capital. However, PMC Capital expects that most non-SBA
supported loans will be funded by PMC Commercial Trust ("PMC Commercial") in
the future and that such loans will be made by the Company only to the extent
that PMC Commercial does not have available funds. PMC Commercial is a Texas
real estate investment trust and an affiliate of PMC Capital.

          At December 31, 1996 and 1995, PMC Capital had loans receivable, net,
in an aggregate amount of $24.1 million and $27.9 million, respectively. During
the years ended December 31, 1996 and 1995, PMC Capital originated $14.2
million and $7.7 million in loans, respectively and during the year ended
December 31, 1996 contributed $45.6 million in loans to the Partnership
(including the $34.8 million in loans transferred from PMIC and Western
Financial to PMC Capital in conjunction with the Structured Financing). At
December 31, 1996 and 1995, PMC Capital had no loans receivable greater than 60
days past due. PMC Capital had no realized or unrealized losses during the
years ended December 31, 1996 and 1995.



                                       3

<PAGE>   6



NON INVESTMENT COMPANY SUBSIDIARIES

         The accompanying consolidated financial statements include the
accounts of PMC and its wholly owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with the requirements of the Federal securities laws.

         PMC ADVISERS

         PMC Advisers, organized in July 1993, is a registered investment
advisor under the Investment Advisers Act of 1940 which acts as the investment
advisor for PMC Commercial. PMC Advisers provides investment advisory services
to PMC Commercial pursuant to an investment management agreement (the
"Investment Management Agreement") entered into between PMC Capital, PMC
Advisers and PMC Commercial. As the investment advisor for PMC Commercial, PMC
Advisers has earned $1,562,000, $1,189,000 and $429,000 in advisory fees during
the years ended December 31, 1996, 1995 and 1994, respectively.

         PMC CAPITAL CORP., PMC TRUST 1996-A AND THE PARTNERSHIP

         The Partnership was formed as a special purpose affiliate of the
Company. On November 13, 1996, the Partnership, a Delaware limited partnership,
completed the Structured Financing through a private placement (the "Private
Placement") of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a stated
maturity in 2011 and bear interest at the rate of 6.725% per annum, were
originally collateralized by approximately $45.7 million of loans (the "Initial
Loan Contribution") contributed by PMC Capital to the Partnership. The net book
value of the Initial Loan Contribution after deferred commitment fees,
discounts and accrued interest receivable on the date of transfer was
approximately $45.5 million. In connection with the Private Placement, the
Notes were given a rating of "Aa2" by Moody's Investors Service. The
Partnership has the exclusive obligation for repayment of the Notes, and the
holders of the Notes have no recourse to PMC Capital or its other subsidiaries
or their assets in the event of nonpayment of the underlying loans receivable.
The net proceeds from the issuance of the Notes (approximately $37.5 million
before giving effect to payment of issuance costs of approximately $396,000 and
after giving effect to the funding of a $2.04 million reserve fund held by the
trustee as collateral) were distributed to PMC Capital. PMC Capital Corp. was
formed in November 1996 to act as the independent trustee of PMC Trust 1996-A
which is the general partner of the Partnership and owns a 1% general
partnership interest in the Partnership. PMC Capital owns a 99% limited
partnership interest in the Partnership. PMC is the servicer for all loans held
by the Partnership.

         PMC FUNDING

         PMC Funding is a Florida corporation that holds assets on behalf of
the Company. PMC Capital is the sole shareholder of PMC Funding. Operations
from PMC Funding consist of income generated from the operation of properties
held and charter revenue derived from use by third parties of PMC Funding's
airplane.

ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY

         In 1980, the 1940 Act was amended to permit closed-end investment
companies which make certain types of investments ("Qualifying Assets") to
elect to become business development companies ("BDCs") rather than registered
investment companies. Under this amendment (the "1980 Amendment"), BDCs must
register their shares under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and become subject to the Exchange Act's periodic
reporting requirements rather than the 1940 Act's reporting requirements.
During 1994, PMC Capital elected to operate as a BDC. Companies having
securities registered under the Exchange Act, such as PMC Capital, must file
quarterly rather than semi-annual financial reports. The 1980 Amendment
provides BDCs with greater operating flexibility relating to capital structure,
portfolio diversification, transactions with downstream affiliates, executive
stock options and the frequency of which they may make distributions from
capital gains, that may be greater than that available to registered investment
companies.

         Under the 1980 Amendment, a BDC such as PMC Capital may only acquire
Qualifying Assets unless, at the time of their acquisition, Qualifying Assets
represent at least 70% of the value of the BDC's total assets. The principal
categories of Qualifying Assets relevant to the business of PMC Capital are the
following:



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(1) Securities purchased in transactions not involving any public offering from
the issuer of such securities, which issuer is an eligible portfolio company.
An eligible portfolio company is defined in the 1980 Amendment as any issuer
which:

         (a)   is organized under the laws of, and has its principal place of
               business in, the United States;

         (b)   is not an investment company other than an SBIC wholly-owned
               by the BDC (PMC Capital's investments in and advances to PMIC,
               Western Financial and First Western are Qualifying Assets ); and

         (c)   does not have any class of securities with respect to which a
               broker or dealer may extend margin credit.

(2) Securities received in exchange for or distributed on or with respect to
securities described in (1) above, or pursuant to the exercise of options,
warrants or rights relating to such securities.

(3) Cash, cash items, Government securities or high quality debt securities
maturing in one year or less from the time of investment.

         In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments
in the type of securities described in (1) above and, in order to classify the
securities as Qualifying Assets for purposes of the 70% test, the BDC must make
available to the issuer of the securities significant managerial assistance
which means, among other things:

         (1)   Any arrangement whereby the BDC, through its directors,
               officers or employees, offers to provide, and, if accepted,
               does so provide, significant guidance and council concerning
               the management, operations or business objectives and
               policies of a portfolio company; or

         (2)   In the case of an SBIC, making loans to a portfolio company.

         Under the 1980 Amendment, now that PMC Capital has elected to be
regulated as a BDC, it may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by the vote of a
majority of the shares of Common Stock.

FUNDAMENTAL AND OTHER POLICIES OF THE COMPANY AND ITS SUBSIDIARIES

         PMC Capital and each of its investment company subsidiaries have
designated certain investment policies as "fundamental policies," which may
only be changed with the approval of the holders of PMC Capital's outstanding
shares of Common Stock as described below.

         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. All
other investment policies of PMC Capital may be changed by its Board of
Directors 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.




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<PAGE>   8



         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.

         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. PMIC 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 PMIC may not be changed without the prior written
consent of the SBA.

         As stated above, the Company has a fundamental policy regarding
investment in the lodging industry. At December 31, 1996 and 1995, loans to
businesses in the lodging industry comprised 44% and 55% of its total assets,
respectively.

         There can be no assurance that the Company will continue to experience
the positive results it has historically achieved from lending to the lodging
industry or that market conditions will enable the Company to maintain or
increase its level of loan concentration in this industry. Any economic factors
that negatively impact this industry could have a material adverse effect on
the business of the Company. Additionally, at December 31, 1996, loans to
businesses located in Texas, Florida and Georgia comprised approximately 38%,
13% and 11% of the Company's outstanding loan portfolio, respectively. A
decline in economic conditions in any of these states may adversely affect the
Company.

COMPETITION

         PMC Capital's primary competition comes from banks, financial
institutions, franchise loan programs and other companies operating under SBA
sponsored programs. Some of these competitors have greater financial and larger
managerial resources than the Company. Competition has increased as the
financial strength of the banking and thrift industries improved. PMC Capital
believes that it competes effectively with such entities on the basis of the
interest rates, maturities and payment schedules, the quality of its service,
its reputation as a lender, the timely credit analysis and decision making
processes, and the renewal options available to borrowers. In addition, to the
extent that the investment opportunities reviewed by PMC Advisers conform to
the investment criteria of PMC Commercial, and PMC Commercial has funds
available to make these investments, such investments will be made by PMC
Commercial.

         During December 1995, in addition to being a "Certified SBA lender" in
Miami, Florida and "Preferred SBA lender" in Dallas, Texas, First Western was
granted the designation of a "preferred lender" in over 50 additional districts
of the SBA. Under the 7(a) Program, in order to have an SBA guarantee, the
lender must have some level of SBA approval. Within the 7(a) Program, the
different status levels for SBA approvals are (i) guaranteed lender, (ii)
certified lender and (iii) preferred lender. Approval of loans under the
guaranteed lender program requires the greatest amount of review time by the
SBA while loans under the preferred lender program require the least. The
granting of preferred lender status to First Western assists the Company in
competing for loan origination opportunities due to the reduction in approval
time.




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<PAGE>   9



LEVERAGE

         The Company has borrowed funds and issued shares of preferred stock,
and intends to borrow additional funds through advances on its revolving credit
facility and through the issuance of notes payable or SBA Debentures, if
available, see "Overview of SBA Regulations." As a result, the Company is
leveraged. The SBA and private lenders have fixed dollar claims on the
Company's assets superior to the claims of the holders of Common Stock. Any
increase in the interest rate earned by the Company 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 its net income and
earnings per share to increase more than it would without the leverage, while
any decrease in the interest rate earned by the Company on investments would
cause net income and earnings per share to decline by a greater amount than it
would without the leverage. Leverage is thus generally considered a speculative
investment technique. In order for the Company to repay indebtedness or meet
its obligations in respect of any outstanding preferred stock on a timely
basis, the Company may be required to dispose of assets at a time which it
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 the Company's
results of operations.

INTEREST RATE AND PREPAYMENT RISK

         Net income of the Company is effected by the spread between the rate
at which it borrows funds and the rate at which it loans these funds. The
portfolio of PMC Capital, Western Financial and PMIC have typically been
long-term and at fixed rates and the borrowed funds of these companies are
typically long-term and at fixed rates. First Western originates variable rate
loans and has utilized equity capital of PMC Capital and a structured sale in
1994 to obtain funds necessary to originate loans. If the yield on loans
originated by the Company with funds obtained from borrowings or the issuance
of preferred stock fails to cover the cost of such funds, the Company's cash
flow will be reduced. During periods of changing interest rates, interest rate
mismatches could negatively impact the Company's net income, dividend yield and
the market price of the Common Stock. Most of the fixed rate loans that the
Company originates have prepayment penalties. If interest rates decline, the
Company may experience significant prepayments. Such prepayments, as well as
scheduled repayments, are likely to be reloaned or invested at lower rates,
which may have an adverse effect on the Company's ability to maintain
distributions at existing levels.

EMPLOYEES

         At December 31, 1996, the Company had 56 employees. Management of the
Company believes its relationship with its employees is good.


OVERVIEW OF SBA REGULATIONS

         The lending operations of First Western, PMIC and Western Financial
are regulated by the SBA establishing, among other things, maximum interest
rates that borrowers may be charged (which currently may not exceed the greater
of 19% per annum or 11% above the Company's cost of funds from the SBA) and
minimum and maximum maturities for the Company's loans (which generally range
from four to 25 years). Borrowers must satisfy certain criteria established by
the SBA to qualify for loans originated by the Company 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 the omnibus funding bill signed into legislation by
Congress in October 1996, the SBIC program was authorized to issue a minimum of
$256 million in SBA Debentures in the SBA's fiscal year ending September 30,
1997. This is significantly above amounts available in 1996; however, there are
increased costs for new SBA Debentures. A flat 3% "draw-down" fee will replace
the 2% commitment fee and there will be an increase of 100 basis points in the
interest rates to be charged. The interest rates previously charged on SBA
Debentures were approximately 70 basis points over the 10 year Treasury Note.
As adjusted, the new rates would be approximately 170 basis points over the 10
year Treasury Note. As part of this legislation, the availability of 3%
subsidized Debentures and the right of the SBA to purchase preferred stock of
an SSBIC was repealed. This will have no effect on previously issued Debentures
or preferred stock of SSBICs including PMIC.



                                       7

<PAGE>   10



          Appropriations for the 7(a) Program under the omnibus funding bill for
the fiscal year ending September 30, 1997 were approved. The 7(a) Program will
receive an aggregate of $158 million in direct appropriation with an additional
$40.5 million carry over of unused funds from 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - 
Liquidity and Capital Resources."


ITEM 2.   PROPERTIES

          The Company's headquarters are located at 17290 Preston Road, Dallas,
Texas 75252 where its facilities comprise approximately 12,400 square feet of
space pursuant to leases with a corporation, a majority of whose shareholders
are officers and/or directors of the Company. In addition, at December 31,
1996, the Company also leased office space in Hollywood, Florida and Atlanta,
Georgia. The aggregate annual lease payments for the year ended December 31,
1996 were approximately $213,000.


ITEM 3.   LEGAL PROCEEDINGS

          The Company is involved from time to time in routine litigation
incidental to its business. The Company does not believe that the current
proceedings will have a material adverse effect on the results of operations or
financial condition of the Company.


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, 1996.




                                       8

<PAGE>   11



                                    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 the Company for each such period.


<TABLE>
<CAPTION>          
                                                                      Regular         Special
                                                                     Dividends       Dividends
                                                                        Per             Per
Quarter Ended                                   High         Low       Share           Share
-------------                                   ----         ---    ----------       ---------
<S>                                             <C>         <C>      <C>             <C>
March 31, 1994...............................  $16.25       $14.00       $0.225          --  
June 30, 1994................................  $17.38       $14.50       $0.230          --
September 30, 1994...........................  $17.13       $14.13       $0.235          --
December 31, 1994............................  $14.88       $11.88       $0.240        $0.125
                                                                                  
March 31, 1995...............................  $13.50       $11.13       $0.245          --
June 30, 1995................................  $12.13       $10.75       $0.250          --
September 30, 1995...........................  $12.00       $10.88       $0.255          --
December 31, 1995............................  $13.25       $11.38       $0.260        $0.065
                                                                                  
March 31, 1996...............................  $13.63       $11.88       $0.270          --
June 30, 1996................................  $13.38       $12.38       $0.280          --
September 30, 1996...........................  $14.25       $11.75       $0.295          --
December 31, 1996............................  $14.75       $12.88       $0.300        $0.020
</TABLE>


         On February 28, 1997, there were approximately 1,700 shareholders of
record of Common Stock and the last reported sales price of the Common Stock
was $14.25 per share.





                                       9

<PAGE>   12



ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

          The following summary of Selected Consolidated Financial Data of the
Company should be read in conjunction with the consolidated financial
statements of the Company 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 financial data below provides
information about the Company's financial history and is derived from the
audited financial statements.

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                          -----------------------------------------------------------------
                                             1996           1995        1994           1993         1992
                                             ----           ----        ----           ----         ----
                                                      (in thousands, except per share information)
<S>                                       <C>           <C>           <C>           <C>           <C>     
Operating:
    Operating income ..................   $  23,821     $  21,262     $  16,450     $  15,670     $ 11,780
    Operating expenses ................   $ (10,454)    $  (9,541)    $  (7,578)    $  (5,933)    $ (4,705)
    Realized and unrealized gain (loss)
      on investments ..................   $    (147)    $    (359)    $   3,151     $    (404)    $   (263)
    Net operating income and realized
      and unrealized gain (loss) on
       investments ....................   $  13,220     $  11,362     $  12,023     $   9,333     $  6,812
    Dividends declared, common ........   $  12,853     $  11,600     $  11,244     $   9,367     $  6,349
    Earnings per common share .........   $    1.18     $    1.03     $    1.12     $    0.87     $   0.79
    Dividends per common share ........   $    1.16     $    1.08     $    1.06     $    0.89     $   0.69
    Weighted average common
      shares outstanding ..............      11,002        10,768        10,650        10,579        8,557
    Loans funded ......................   $  70,154     $  77,567     $  75,349     $  74,091     $ 55,975
At end of period:
    Loans receivable, net .............   $  93,354     $ 110,499     $  75,264     $  71,528     $ 54,059
    Total assets ......................   $ 164,964     $ 159,002     $ 125,416     $ 112,515     $ 85,933
    SBA debentures payable ............   $  44,570     $  43,540     $  26,280     $  20,280     $ 22,280
    Notes payable .....................   $  35,000     $  35,001     $  25,001     $  25,001     $      1
    Preferred stock of consolidated
       subsidiary .....................   $   7,000     $   7,000     $   5,000     $   3,000     $  3,000
    Common shareholders' equity .......   $  62,903     $  59,088     $  57,371     $  55,524     $ 54,839
    Number of common shares
      outstanding .....................      11,162        10,871        10,684        10,603       10,542

Ratios:
    Return on average assets ..........         8.3%          8.0%         10.3%          9.4%         9.6%
    Return on average common
      shareholders' equity ............        21.3%         19.2%         21.2%         16.8%        17.1%
</TABLE>




                                       10

<PAGE>   13
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment advisor who evaluates and
services loans under a fee arrangement for PMC Commercial. In addition, the
Company sells the guaranteed portion its loans originated under the 7(a)
Program and in November 1996 securitized a portion of its fixed-rate portfolio
as part of the Structured Financing as an additional source of working capital.
Historically, the Company has retained servicing and residual interests in all
loans sold.

         The Company's revenue sources include the following:

         o    Interest earned on loans originated and retained including the
              effect of commitment fees collected at the inception of the loan
              (generally 3% on fixed rate loans).
         o    Advisory fee income from the management of PMC Commercial.
         o    Equity in the income of non-investment company subsidiaries.
         o    Premiums recognized from the sale of the government guaranteed
              portion of 7(a) Program loans sold into the secondary market.
         o    Interest earned on temporary (short-term) investments.
         o    Other fees, including: late fees, prepayment fees, construction
              monitoring and site visit fees.

         In order to generate revenues, PMC originates commercial loans. The
following table sets forth information concerning the aggregate gross loans
funded for the Company and the respective changes from previous years:

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                          ------------------------------------------------------------------------
                                 1996                          1995                   1994
                          --------------------      ---------------------   ----------------------
                                                          (In millions)
                                      Increase                  Increase                 Increase
Company                    Funded    (Decrease)      Funded     (Decrease)    Funded    (Decrease)
-------                   -------    ----------     --------    ----------   --------   ----------
<S>                       <C>          <C>          <C>            <C>       <C>           <C> 
PMIC ...............      $  19.3      (9%)         $  21.2        108%      $  10.2       209%
Western
  Financial ........          7.5      (6%)             8.0         11%          7.2       500%
First Western ......         29.2     (28%)            40.6         (2%)        41.6       (22%)
PMC Capital ........         14.2      84%              7.7        (53%)        16.4         1%
                          -------                   -------                  ------- 
Total ..............      $  70.2      (9%)         $  77.5          3%      $  75.4         2%
                          =======                   =======                  =======
</TABLE>

         In 1993, the Company organized a registered investment advisor which
pursuant to the terms of an investment management agreement acts as the
investment advisor for PMC Commercial. The Company's subsidiary, PMC Advisers,
has been the investment advisor for PMC Commercial since the completion of PMC
Commercial's public offering in December 1993 (see footnote 14 to the
accompanying consolidated financial statements). During 1996 PMC Advisers
earned management fees of $1.6 million from PMC Commercial.

         The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November
1996 the Partnership completed the Private Placement of approximately $40.7
million of Notes which were issued at par and have an interest rate of 6.725%.
The Notes were originally collateralized by approximately $45.7 million of
loans contributed to the Partnership by PMC Capital. The net proceeds of the
issuance of the Notes, approximately $37.5 million were distributed to PMC
Capital and are being utilized to originate additional loans. The differential
between the interest received on the collateralized loans (originally $45.7
million at an average yield of 11.5%) and the interest paid on the Notes
(originally $40.7 million at 6.725%), less any loan losses and amortization of
transaction fees, will contribute to the profit of PMC Capital.




                                       11

<PAGE>   14



         Due to the reduction of loan origination opportunities experienced by
First Western over the past several years, the Company has actively sought to
increase other sources of revenues and thereby reduce its reliance on the
income generated by First Western. During this period the Company's other
lending activities have increased and the Company has established other revenue
sources such as the investment advisory income.

         The Company has initiated a new marketing program and positioned
itself to add an additional lending program. Late in the fourth quarter of 1996
the Company began marketing a variable rate lending program (the "Prime Lending
Program") which is separate from the 7(a) Program of First Western, the
Company's other variable rate lending program. The Prime Lending Program is
designed to refinance existing real estate secured commercial loans with
borrowers who have proven timely payment histories and loan-to-value and debt
coverage ratios within the Company's underwriting criteria. It is anticipated
that many of the loans refinanced under this program will originally have been
7(a) Program loans and that some of these loan originations may refinance loans
currently in First Western's portfolio. These loans will have variable interest
rates based on the Prime Rate (as defined below).

         Additionally, the Company has been approved as a licensee under the
Rural Economic Development Business and Industry Loan Program sponsored by the
U.S. Department of Agriculture (the "B & I Loan Program"). Under the B & I Loan
Program, loans are to be originated in rural areas (generally city areas with a
population of less than 50,000) and are partially guaranteed by the U.S.
Government. The U.S. Government guarantees repayment of up to 80% of the
principal amount of loans originated under the B & I Loan Program.

         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 Journal on the first day of the applicable period ("Prime
Rate"). The spread over the Prime Rate charged by First Western ranges from
1.0% to 2.75%

         Prime rates utilized by First Western were as follows:

<TABLE>
<CAPTION>
                                         1996      1995      1994
                                         ----      ----      ----
                  <S>                    <C>       <C>       <C>  
                  First Quarter          8.50%     8.50%     6.00%
                  Second Quarter         8.25%     9.00%     6.25%
                  Third Quarter          8.25%     9.00%     7.25%
                  Fourth Quarter         8.25%     8.75%     7.75%
</TABLE>

         Due to the decline in interest rates since 1995 and the increased
availability of either fixed rate loans or variable rate loans with interest
rates less than that on the outstanding portfolio of First Western, prepayments
have increased.

         The Company experienced a 9% decrease in loans originated from $77.6
million during the year ended December 31, 1995 to $70.2 million during the
year ended December 31, 1996. This origination reduction is due in significant
part to increased competition. In management's opinion, there has been an
increasing amount of competitor lending activity at advance rates and interest
rates which are considerably more aggressive than those offered by the Company.
In order to maintain a quality portfolio, the Company will continue to adhere
to its historical underwriting criteria, and as a result, certain loan
origination opportunities will not be funded by the Company. The Company has
instituted the Prime Lending Program to attract those established seasoned
small business lending opportunities which merit lower interest rates. The
yield on these loans (assuming no change in the Prime Rate) will be lower than
the Company has historically experienced.

         As a result of its working capital requirements for loan originations
as well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, the Company has temporary short-term
investments. In order to minimize its short-term investment positions, the
Company may enter into a bank warehouse facility and anticipates greater
utilization of its revolving credit facility.

         The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees. The net amount of other investment income earned during 1996 was $608,000.
The amount earned will vary based on volume funded, the mix of loans
(construction versus non-construction), the rate on loans originated (whether
fixed or floating) as well as the general level of interest rates.

         Expenses primarily consist of interest expense and company overhead.
Expenses were 44% of total income during the year ended December 31, 1996
compared to 45% during the year ended December 31, 1995.





                                       12

<PAGE>   15



         Interest expense was $5.7 million during 1996. Interest expense is
primarily derived from (i) $35 million of unsecured notes with a weighted
average interest rate of 7.3% and weighted average remaining maturity of 4.8
years as of December 31, 1996, and (ii) $44,570,000 of Debentures due to the
SBA as a result of borrowings made by the Company's SBIC subsidiaries, with a
weighted average interest rate of 6.9% and weighted average remaining maturity
of 5.7 years as of December 31, 1996. At December 31, 1996, the Company had no
borrowings outstanding pursuant to its revolving credit facility, and had
availability of $15 million. Any borrowings thereunder would bear interest at a
rate based on either the prime rate or Libor.

         Company overhead was $4.7 million in 1996 and is comprised of salaries
and related benefits, general and administrative expense, profit sharing plan,
rent, legal and accounting, SBA fees and directors and shareholders expense. The
Company's operations are centralized from its headquarters in Dallas, Texas. The
Company presently has other marketing offices located in Hollywood, Florida,
Atlanta, Georgia and Phoenix, Arizona. The largest overhead expense is the
salaries and related benefits which consist of salaries for the Company's
officers and employees who provide for all of the Company's management and
portfolio functions including marketing, closing, servicing, accounting and
portfolio analysis. Salaries and related benefits were 13% of total income
during each of the years ended December 31, 1996 and 1995. It is anticipated
that overhead will continue to increase as the Company's portfolio under
management increases.

         General and administrative expenditures consist primarily of the Texas
franchise and other taxes, advertising and promotional expense, telephone
services, corporate printing costs and general office expenses. General and
administrative expenses were 4% of total income during the year ended December
31, 1996 compared to 5% during the year ended December 31, 1995. These costs
are anticipated to increase in proportion to the growth of the Company's
portfolio under management. The largest component of expense, the Texas
franchise tax, is currently being reviewed by the Texas legislature with
significant modifications being considered. During the year ended December 31,
1996, the Company expensed $197,000 relating to the Texas franchise tax.

         Profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense (collectively the "Other Administrative
Costs") aggregated $723,000 for the year ended December 31, 1996. The Other
Administrative Costs were 3% of total income for each of the years ended
December 31, 1996 and 1995. These costs are anticipated to increase in
proportion to the increase in salaries and general administrative expense as a
result of the anticipated growth of the Company's portfolio under management.

         In 1994, PMIC filed a registration statement with the Securities and
Exchange Commission to register shares of its common stock. The Company
incurred approximately $136,000 in costs in connection with the filing of this
registration statement. PMIC, a licensed specialized small business investment
company, uses long-term funds provided by the SBA through the issuance of
Debentures (which are guaranteed by the SBA and on which the interest rate is
reduced through an SBA subsidy by 3% during the first five years). Based on the
lack of availability of SBA subsidized Debentures or preferred stock , the
registration was suspended. Accordingly, during the year ended December 31,
1995, the Company has expensed the costs of registration.

CERTAIN ACCOUNTING CONSIDERATIONS

         In accordance with its business and financing strategy, the Company
sells the guaranteed portions of its SBA loans while retaining servicing
rights. A portion of the Company's revenue is recognized from the premium on
the sale of loans, which principally represents either cash received or an
excess servicing spread. The excess servicing spread is calculated as the
present value of the difference between the interest rate charged by the
Company to a borrower and the interest rate paid to the investors who purchased
the loan (adjusted for prepayment assumptions) to the extent that this
difference exceeds the normal loan servicing fees (the "Excess Servicing
Spread"). At the time of sale, the value of the Excess Servicing Spread is
reported as income and concurrently recorded as a corresponding asset on the
Company's consolidated balance sheet (the "Excess Servicing Asset").

         During the first quarter of 1995, the Company completed a reassessment
of the method used to amortize the Excess Servicing Asset. Historically, the
Company had amortized the Excess Servicing Asset based upon the estimated life
for each loan at the time of sale, expectation of prepayments and other
considerations. When a loan was paid in full, the remaining unamortized Excess
Servicing Asset, if any, was charged against income. Considering the above
factors and the Company's historical portfolio performance, the Company
extended to the expected remaining life of the related loans, on a pooled
basis, the period over which the remaining Excess Servicing Asset would be
amortized for loans originated and sold prior to January 1, 1995. The Excess
Servicing Asset is amortized on an accelerated method over the estimated
remaining lives of the related assets. There can be no assurance of the
accuracy of management's prepayment estimates. If prepayments occur at a faster
rate than expected, the amortization of the Excess Servicing Asset will be
accelerated as



                                       13

<PAGE>   16



a charge to earnings. If actual prepayments occur at a slower rate than
estimated, cash flows from the Excess Servicing Spread would exceed previously
expected amounts and total income in future periods would be enhanced.
Management will evaluate on an ongoing basis the future benefit anticipated
from the Excess Servicing Asset. If it is determined that the future benefit is
impaired, the Company will reflect the impairment as a charge to earnings
during the period evaluated. To the extent future Excess Servicing Spread
exceeds the estimated amortization of the Excess Servicing Asset pertaining to
these loans, additional revenues will be recognized.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

         Interest income increased by $2,241,000 (14%) from $16,330,000 for the
year ended December 31, 1995, to $18,571,000 for the year ended December 31,
1996. This increase was primarily attributable to the growth in the Company's
portfolio. The average loan portfolio outstanding during the year ended
December 31, 1996 was $124.9 million, a 33% increase from $94.1 million in the
comparable period of 1995. Accordingly, interest income on loans increased by
$3,076,000 (21%) from $14,428,000 during the year ended December 31, 1995, to
$17,504,000 during the year ended December 31, 1996. Average temporary
investments outstanding during the year ended December 31, 1996 were $21.3
million, a 34% decrease from $32.4 million for the year ended December 31,
1995. Accordingly, interest income on temporary investments decreased by
$835,000 (44%) from $1,902,000 during the year ended December 31, 1995 to
$1,067,000 during the year ended December 31, 1996.

         Premium income decreased by $905,000 (32%) from $2,847,000 for the
year ended December 31, 1995, to $1,942,000 for the year ended December 31,
1996. This decrease was primarily attributable to a 33% decrease in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program)
during the year ended December 31, 1996 ($20.0 million) as compared to the year
ended December 31, 1995 ($29.9 million).

         Other investment income, net, increased by $240,000 (65%) from
$368,000 for the year ended December 31, 1995, to $608,000 for the year ended
December 31, 1996. This increase was primarily attributable to an increase of
$200,000 in fees received on loans which prepaid during the year ended December
31, 1996 as compared to the year ended December 31, 1995. The Company
experienced a greater number of loan prepayments in 1996 as compared to 1995
because of the general decline in interest rates and the increased competition
for financing in the lodging industry.

         Equity in income (loss) of non-consolidated subsidiaries increased by
$447,000, from a loss of $78,000 during the year ended December 31, 1995 to
income of $369,000 during the year ended December 31, 1996. The increase is
primarily due to the formation of the Partnership in November 1996 which had
net profits of $328,000. The Partnership profits include all yield generated
from the loans contributed by PMC Capital less the cost of the Notes issued by
the Partnership. The net income from the Partnership included $80,000 in fees
received on prepaid loans. In addition, PMC Funding realized an increase in
revenues from charter services of its airplane which resulted in a change in
profits from a loss of $78,000 during the year ended December 31, 1995 to a
profit of $41,000 during the year ended December 31, 1996.

         Other income, net, increased by $536,000 (30%) from $1,795,000 during
the year ended December 31, 1995, to $2,331,000 during the year ended December
31, 1996. This increase was primarily a result of investment management fees
generated by PMC Advisers which increased by approximately $400,000 (33%) from
$1.2 million during the year ended December 31, 1995 to $1.6 million during the
year ended December 31, 1996.

         Operating expenses, excluding interest, increased by $255,000 (6%)
from $4,492,000 during the year ended December 31, 1995, to $4,747,000 during
the year ended December 31, 1996. This increase was a result of an increase in
salaries and related benefits of $402,000 (15%) from $2,778,000 during the year
ended December 31, 1995, to $3,180,000 during the year ended December 31, 1996.
The increase in salaries and related benefits was a result of increased number
of employees (due to the increase in portfolio under management and the
complexity of the financing transactions undertaken by the Company), and a
general increase in the level of salaries for employees during 1996. This
increase was offset partially by a $210,000 decrease in administrative and
general costs. During the third quarter of 1995, the Company expensed
approximately $106,000 of costs pertaining to its decision not to pursue an
offering of common stock of PMIC. Also, the Company had reductions in
advertising, telephone and travel expenses when comparing the year ended
December 31, 1996 to the year ended December 31, 1995. Advertising reductions
were due to fewer newspaper ad placements, telephone reductions were due to a
change in long distance carriers and travel reductions were due to increased
use of PMC Funding's airplane.

         Interest expense increased by $659,000 (13%) from $5,049,000 during
the year ended December 31, 1995, to $5,708,000 during the year ended December
31, 1996. The increase was primarily attributable to: (i) the interest expense
on approximately $17.3 million of SBA Debentures which were issued or assumed
during the year ended December 31,



                                       14

<PAGE>   17



1995 by PMIC and Western Financial, (ii) the assumption of $1,030,000 of SBA
Debentures in June 1996, (iii) the scheduled increase in the interest rate on
$2.0 million of PMIC's SBA Debentures during June 1995 and (iv) the issuance of
$10.0 million of unsecured notes by PMC Capital in April 1995.

         Realized and unrealized gain (loss) on investments changed from a loss
of $359,000 during the year ended December 31, 1995 to a loss of $147,000
during the year ended December 31, 1996. The decrease in the aggregate losses
on a dollar amount and a percentage basis was due to continued steady
performance of the lodging portion of the portfolio. In addition, to the extent
loans were deemed non-performing or were liquidated or foreclosed upon, the
percentage recovery has generally been substantial due to the high
concentration of real estate collateral on such loans. Realized and unrealized
gain (loss) on investments as a percentage of average loans receivable for the
year ended December 31, 1996 and 1995 were 0.12% and 0.38%, respectively.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

         Interest income increased by $4,378,000 (37%) from $11,952,000 for the
year ended December 31, 1994, to $16,330,000 for the year ended December 31,
1995. This increase was primarily attributable to: (i) the growth in the
Company's portfolio from $75.3 million at December 31, 1994 to $110.5 million
at December 31, 1995, (ii) the increased yield on First Western's loan
portfolio as a result of an increase in the Prime Rate and (iii) the increased
interest earned on temporary investments from funds received on the
securitization and structured sale of assets during December 1994 which were
placed in short-term investments until loans were funded.

         Premium income increased by $119,000 ( 4%) from $2,728,000, million
for the year ended December 31, 1994, to $2,847,000 for the year ended December
31, 1995. The premium income increased even though the volume of loans sold
decreased by $2.7 million, or 8%, from $33.0 million during the year ended
December 31, 1994 to $30.3 million during the year ended December 31, 1995.
This increase in premium income was primarily attributable to the increased
demand for these SBA loan products by the secondary market. The increased
demand was a result of stabilized interest rates and the decrease in the prime
rate in July 1995. Accordingly, the premium on individual loans sold increased.
The premium derived from the secondary market is directly related to the term
of the loan.

         Other investment income, net, increased by $65,000 ( 21%) from
$303,000 for the year ended December 31, 1994, to $368,000 for the year ended
December 31, 1995. This increase was primarily attributable to forfeited
deposits and prepayment fees.

         Other income, net, increased by $328,000 (22%) from $1,467,000 during
the year ended December 31, 1994, to $1,795,000 during the year ended December
31, 1995. This increase was primarily attributable to the investment management
fees generated by PMC Advisers.

         Operating expenses, excluding interest, increased by $529,000 (13%)
from $3,963,000 during the year ended December 31, 1994, to $4,492,000 during
the year ended December 31, 1995. Included in operating expenses for the year
ended December 31, 1995, are $136,000 pertaining to the aggregate of costs of
the PMIC registration statement. This increase was also primarily attributable
to: (i) increased staff and general overhead necessary to manage the increased
portfolio of the Company, (ii) the operations of PMC Advisers and (iii)
increases in state franchise tax expense.

         Interest expense increased by $1,434,000 (40%) from $3,615,000 during
the year ended December 31, 1994, to $5,049,000 during the year ended December
31, 1995. This increase was primarily attributable to: (i) the interest expense
on $23,260,000 in SBA Debentures issued or assumed between September 1994 and
September 1995 by PMIC and Western Financial, (ii) the scheduled increase in
interest rate on $5,000,000 of PMIC's SBA Debentures during the first half of
1995 and (iii) the issuance of $10,000,000 of senior notes by PMC Capital on
April 19, 1995.

         Due to First Western's securitization and structured sale of assets,
during the year ended December 31, 1994, the Company recognized a $3,346,000
gain. This gain represented the difference between the proceeds from the sale
of these assets plus the present value of the difference between the interest
charged to the borrowers and the interest paid to the purchasers less the
carrying value of the assets (including discounts from the application of
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force 88-11)
and an allowance for credit losses. During the year ended December 31, 1995,
the Company did not complete any securitization or structured sale, and did not
have any comparable gain recognized. Not including the aforementioned gain,
realized and unrealized loss on investments has increased by $163,000 (83%)
from a loss of $196,000 for the year ended December 31, 1994, to a loss of
$359,000 during the year ended December 31, 1995. This increase in loss is
attributable primarily to a greater number of loans in the process of
liquidation during 1995. Based on updated area demographics, appraisals and the
condition of the collateral properties, valuation



                                       15

<PAGE>   18



reserves were increased. However, loan losses for the year ended December 31,
1995 continued at an annualized rate of approximately 0.39% of average
outstanding loans receivable, primarily attributable to: (i) minimal losses
incurred in the Company's largest industry concentration (the lodging
industry), (ii) continued monitoring efforts, (iii) the strong economy and (iv)
the low interest rates over the previous several years.

CASH FLOW ANALYSIS

         The Company generated $14.1 million and $12.9 million from operating
activities during the years ended December 31, 1996 and 1995, respectively. The
increase of $1.2 million (9%) was primarily attributable to the increase in net
income from $11.4 million to $13.2 million. Included in cash flows from
operating activities is the lending activity of First Western relating to the
government guaranteed portion of loans originated which are sold into the
secondary market ("Government Guaranteed Lending"). During the years ended
December 31, 1996 and 1995, the Company used net cash of $1,927,000 and
$169,000, respectively, from Government Guaranteed Lending activities.

         The Company used $25.9 million and $31.9 million from investing
activities during the years ended December 31, 1996 and 1995, respectively. The
Company increased its use of funds for loans originated by $800,000 from $47.1
million during the year ended December 31, 1995 to $48.2 million during the
year ended December 31, 1996. During the year ended December 31, 1996 principal
collected was $22.6 million as compared to $10.7 million during the year ended
December 31, 1995. This increase of $11.8 million (110%) was primarily due to
an increase in prepayments on larger principal balance fixed rate loans during
1996 primarily in the portfolios of PMC Capital and PMIC and increased
prepayment activity on the variable rate portfolio of First Western (which
loans have no prepayment fees). Also included as proceeds from investing
activity are the proceeds from maturities of government securities ($8.9
million) net of purchases of $3.9 million during the year ended December 31,
1995 for which there were no comparable transactions during the year ended
December 31, 1996.

         The Company generated $30.4 million from financing activities during
the year ended December 31, 1996 as compared to $16.9 million during the year
ended December 31, 1995. The source of funds in 1995 were primarily from the
issuance of $25 million in debt, $2 million in preferred stock of PMIC and $1.4
million from the issuance of Common Stock pursuant to the Company's Dividend
Reinvestment plan ("DRP Stock Issuance"). The source of funds in 1996 were
primarily the net proceeds from the issuance of Notes by the Partnership ($37.5
million) which were distributed to PMC Capital and $2.8 million from DRP Stock
Issuances. Dividends paid during the year ended December 31, 1996 were $11.9
million as compared to $11.2 million during the year ended December 31, 1995,
an increase of $700,000 (6.0%).

LIQUIDITY AND CAPITAL RESOURCES

         The primary use of the Company's funds is to originate loans, and from
time to time, the Company may use funds to acquire loans from governmental
agencies and/or their agents. The Company also uses funds for the payment of
financing costs, dividends to shareholders, general and administrative
expenses, capital expenditures, advances on loan liquidations and payments of
principal due on borrowing facilities. Approximately $2.5 million of the
Company's SBA Debentures became payable in February 1997 and were paid in full.
As a regulated investment company, pursuant to the Internal Revenue Code of
1986, the Company is required to pay out substantially all of its net
investment company taxable income to the common shareholders. To sustain growth
in the size of its investment portfolio, the Company continually reviews the
need for obtaining additional funds from either: (i) debt offerings and
additional credit facilities, (ii) securitization and sale of a portion of the
loan portfolio and/or (iii) equity offerings. Historically, the Company's
primary sources of capital and liquidity have been Debentures issued through
programs of the SBA, private and public issuances of common stock, the issuance
of senior unsecured notes, the securitization and sale of its loan portfolio
and the utilization of its short-term, uncollateralized revolving credit
facility.

         Loan commitments outstanding at December 31, 1996 to various
prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $45.9 million. Of
these commitments, $6.6 million were for loans partially guaranteed by the SBA
of which approximately $5.0 million will be sold into the secondary market.
Such commitments are made in the ordinary course of the Company's 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.



                                       16

<PAGE>   19



         In order to meet its working capital requirements and increase the
size of its investment portfolio, during the years ended December 31, 1995 and
1996, the Company has completed the following leverage transactions:

<TABLE>
<CAPTION>
                                                                  STATED
                                                                 MATURITY
    DATE               AMOUNT              RATE                    DATE                  DESCRIPTION
---------------     ------------       -------------        --------------------       --------------- 
<S>                 <C>                <C>                  <C>                       <C>
April, 1995         $  5,000,000         8.600%             April, 2003                Unsecured note
April, 1995         $  5,000,000       Libor + 1.300%       April, 2004                Unsecured note
May, 1995           $  2,000,000         4.000%             May, 2010                  Preferred Stock - PMIC
May, 1995 (1)       $  2,260,000     7.500% to 10.400%      Up to December, 2002       SBA Debentures
March, 1995         $  3,000,000          4.840% (2)        March, 2005                SBA Debentures
June, 1995          $  5,000,000          3.690% (2)        June, 2005                 SBA Debentures
September, 1995     $  7,000,000          3.875% (2)        September, 2005            SBA Debentures
May, 1996 (1)       $  1,030,000          9.300%            June, 2000                 SBA Debentures
November, 1996      $ 40,746,000          6.725%            November, 2005             Structured Financing (3)
</TABLE>

(1)      Assumed Debentures from a non-affiliated SBIC (see footnote 6 to the
         accompanying consolidated financial statements)

(2)      Rate increases 3%, five years from the date of issuance until maturity.

(3)      Fixed rate loan-backed notes issued by the Partnership (see footnote 15
         to the accompanying consolidated financial statements)

         PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the bank's prime rate less 50 basis points or the London
Interbank Offering Rate (LIBOR) plus 175 basis points. The credit facility
requires the Company to meet certain covenants, the most restrictive of which
includes that the ratio of net charge-offs to net loans receivable will not
exceed 2%, and the ratio of assets to senior debt (as defined in the note
agreement) will not fall below 150%. At December 31, 1996, the Company had no
balance outstanding on this credit facility. At December 31, 1996, the Company
was in compliance with all covenants of this facility.

         Due to changes in the SBIC program to the cost and availability of SBA
Debentures and preferred stock (see "Business - Overview of SBA Regulations"),
the Company has utilized other sources of funds to expand its loan portfolio.
The cost and terms of these other sources of funds will not be as favorable as
those historically achieved on SBA Debentures; however, the Company has been
able to issue debt through private placement of notes and receive working
capital through securitization and sale of a portion of its portfolio. If
additional funds are required, the Company would attempt to either issue
additional unsecured notes, privately or publicly raise equity and/or
securitize and structure a sale of a portion of either the unguaranteed portion
of SBA loans or the portfolio of PMC, Western Financial and/or PMIC. Management
believes that through utilization of one or more of these sources of debt or
equity capital, the Company should meet its liquidity needs for the foreseeable
future.

         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 the Company from the
Securities and Exchange Commission.


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. 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 the control of the Company. Although the Company believes 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 the Company or any other person
that the objectives and plans of the Company will be achieved.



                                       17

<PAGE>   20




RECENT ACCOUNTING PRONOUNCEMENTS

         In 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 122 "Accounting for Mortgage Servicing Rights," an amendment of
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require
that an entity recognize as separate assets rights to service mortgage loans
for others, regardless of how such servicing is acquired. SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995. The effects on
operations and financial condition of implementing SFAS No. 122, in
management's opinion, is not considered significant.

         In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities." Those
standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered and liabilities
are extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and may only be applied prospectively.

         In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation, and disclosure requirements
for earnings per share. SFAS No. 128 is designed to improve the earnings per
share information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of earnings per share data. SFAS No. 128 is effective for
financial statements for periods ending after December 15, 1997. In the opinion
of management, the effect of this pronouncement on earnings per share is not
considered significant.

         In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure."  SFAS No. 129 requires certain disclosure
about an entity's capital structure.  SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.  In the opinion of
management, the effect of this pronouncement on the Company's financial position
or results of operation is not considered significant.


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




                                       18

<PAGE>   21



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Incorporated herein by reference to the Company's 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 14, 1997.


ITEM 11.  EXECUTIVE COMPENSATION

         Incorporated herein by reference to the Company's 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 14, 1997.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated herein by reference to the Company's 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 14, 1997.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated herein by reference to the Company's 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 14, 1997.



                                       19

<PAGE>   22



                                    PART IV


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






                                       20

<PAGE>   23




                                   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 21, 1997

         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.

<TABLE>
<CAPTION>

         Name                  Title                                 Date
         ----                  -----                                 ----
<S>                            <C>                              <C>
/S/ DR. FREDRIC M. ROSEMORE    Chairman of the Board            March 21, 1997
----------------------------   and Treasurer                  
DR. FREDRIC M. ROSEMORE                                       
                                                              
/S/ LANCE B. ROSEMORE          President, Chief Executive       March 21, 1997
----------------------------   Officer, Secretary and Director                         
LANCE B. ROSEMORE              (Principal Executive Officer)  
                                                              
/S/ DR. ANDREW S. ROSEMORE     Executive Vice President,        March 21, 1997
----------------------------   Chief Operating Officer        
DR. ANDREW S. ROSEMORE         and Director                   
                                                              
/S/ BARRY N. BERLIN            Chief Financial Officer          March 21, 1997
----------------------------   (Principal Financial and       
BARRY N. BERLIN                Accounting Officer)            
                                                              
/S/ LEE RUWITCH                Director                         March 21, 1997
----------------------------                                  
LEE RUWITCH                                                   
                                                              
/S/ DR. MARTHA GREENBERG       Director                         March 21, 1997
----------------------------                                  
DR. MARTHA GREENBERG                                          
                                                              
/S/ DR. IRVIN BORISH           Director                         March 21, 1997
----------------------------                                  
DR. IRVIN BORISH                                              
                                                              
/S/ THOMAS HAMILL              Director                         March 21, 1997
----------------------------                                  
THOMAS HAMILL                                                 
                                                              
/S/ ROBERT DIAMOND             Director                         March 21, 1997
----------------------------                                  
ROBERT DIAMOND                                                
                                                              
/S/ BARRY IMBER                Director                         March 21, 1997
----------------------------   
 BARRY IMBER                        
</TABLE>



                                       21

<PAGE>   24
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                                   FORM 10-K
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
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, 1996 and 1995 .....    F-6

      Consolidated Schedule of Investments as of December 31, 1996 .....    F-7

      Consolidated Statements of Income for the Years Ended
        December 31, 1996, 1995 and 1994 ...............................    F-9

      Consolidated Statements of Shareholders' Equity for the
        Years Ended December 31, 1996, 1995 and 1994 ...................    F-10

      Consolidated Statements of Cash Flows for the Years Ended
        December 31, 1996, 1995 and 1994 ...............................    F-11

      Notes to Consolidated Financial Statements .......................    F-12

   Consolidating Financial Statements:

      Consolidating Balance Sheet as of December 31, 1996 ..............    F-31

      Consolidating Statement of Income for the
        Year Ended December 31, 1996 ...................................    F-32

      Consolidating Statement of Shareholders' Equity for
        the Year Ended December 31, 1996 ...............................    F-33

      Consolidating Statement of Cash Flows for the Year
        Ended December 31, 1996 ........................................    F-34

PMC CAPITAL LIMITED PARTNERSHIP
-------------------------------

   Report of Independent Accountants ...................................    F-35

   Statement of Assets, Liabilities and Partners' Capital
     as of December 31, 1996 ...........................................    F-36

   Statement of Income for the Period From
      November 8, 1996 (Inception) to December 31, 1996 ................    F-37

   Statement of Partners' Capital for the Period From
      November 8, 1996 (Inception) to December 31, 1996 ................    F-38

   Statement of Cash Flows for the Period From
      November 8, 1996 (Inception) to December 31, 1996 ................    F-39

   Notes to Financial Statements .......................................    F-40
</TABLE>




                                      F-1
<PAGE>   25
--------------------------------------------------------------------------------
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   SUMMARY OF SELECTED FINANCIAL INFORMATION

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                       ------------------------------------------------------------------
                                                          1996          1995          1994          1993          1992
                                                       ----------    ----------    ----------    ----------    ----------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) 
<S>                                                    <C>           <C>           <C>           <C>           <C>       
OPERATING:

      Operating income .............................   $   23,821    $   21,262    $   16,450    $   15,670    $   11,780

      Operating expenses ...........................      (10,454)       (9,541)       (7,578)       (5,933)       (4,705)

      Realized and unrealized gain (loss)
        on investments .............................         (147)         (359)        3,151          (404)         (263)
                                                       ----------    ----------    ----------    ----------    ----------

      Net operating income and realized
        and unrealized gain (loss) on
        investments ................................   $   13,220    $   11,362    $   12,023    $    9,333    $    6,812
                                                       ==========    ==========    ==========    ==========    ==========

      Dividends declared, common ...................   $   12,853    $   11,600    $   11,244    $    9,367    $    6,349
                                                       ==========    ==========    ==========    ==========    ==========

      Earnings per common share ....................   $     1.18    $     1.03    $     1.12    $     0.87    $     0.79
                                                       ==========    ==========    ==========    ==========    ==========

      Dividends per common share ...................   $     1.16    $     1.08    $     1.06    $     0.89    $     0.69
                                                       ==========    ==========    ==========    ==========    ==========

      Weighted average common shares
        outstanding ................................       11,002        10,768        10,650        10,579         8,557
                                                       ==========    ==========    ==========    ==========    ==========

      Loans funded .................................   $   70,154    $   77,567    $   75,349    $   74,091    $   55,975
                                                       ==========    ==========    ==========    ==========    ==========

AT END OF PERIOD:

      Loans receivable, net ........................   $   93,354    $  110,499    $   75,264    $   71,528    $   54,059
                                                       ==========    ==========    ==========    ==========    ==========

      Total assets .................................   $  164,964    $  159,002    $  125,416    $  112,515    $   85,933
                                                       ==========    ==========    ==========    ==========    ==========

      SBA debentures payable .......................   $   44,570    $   43,540    $   26,280    $   20,280    $   22,280
                                                       ==========    ==========    ==========    ==========    ==========

      Notes payable ................................   $   35,000    $   35,001    $   25,001    $   25,001    $        1
                                                       ==========    ==========    ==========    ==========    ==========

      Preferred stock of consolidated subsidiary ...   $    7,000    $    7,000    $    5,000    $    3,000    $    3,000
                                                       ==========    ==========    ==========    ==========    ==========

      Common shareholders' equity ..................   $   62,903    $   59,088    $   57,371    $   55,524    $   54,839
                                                       ==========    ==========    ==========    ==========    ==========

      Number of common shares outstanding ..........       11,162        10,871        10,684        10,603        10,542
                                                       ==========    ==========    ==========    ==========    ==========

RATIOS:

      Return on average assets .....................          8.3%          8.0%         10.3%          9.4%          9.6%
                                                       ==========    ==========    ==========    ==========    ==========

      Return on average common shareholders'
        equity .....................................         21.3%         19.2%         21.2%         16.8%         17.1%
                                                       ==========    ==========    ==========    ==========    ==========
</TABLE>



                                      F-2
<PAGE>   26
--------------------------------------------------------------------------------
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                              QUARTERLY STATISTICS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31, 1996
                                     ---------------------------------------------------
                                                         (UNAUDITED)

                                      FIRST     SECOND      THIRD     FOURTH
                                     QUARTER    QUARTER    QUARTER    QUARTER     TOTAL
                                     -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>    
OPERATING INCOME .................   $ 5,480    $ 5,904    $ 6,051    $ 6,386    $23,821

NET OPERATING INCOME .............   $ 3,012    $ 3,346    $ 3,421    $ 3,588    $13,367

NET GAIN (LOSS) ON INVESTMENTS ...   $   (17)   $    (1)   $   (23)   $  (106)   $  (147)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ...   $ 2,995    $ 3,345    $ 3,398    $ 3,482    $13,220

<CAPTION>
----------------------------------------------------------------------------------------
                                             PER SHARE
----------------------------------------------------------------------------------------
<S>                                  <C>        <C>       <C>        <C>        <C>    
OPERATING INCOME .................   $ 0.502    $ 0.539   $ 0.550    $ 0.574    $ 2.165

NET OPERATING INCOME .............   $ 0.276    $ 0.305   $ 0.311    $ 0.323    $ 1.215

NET GAIN (LOSS) ON INVESTMENTS ...   $(0.002)      --     $(0.002)   $(0.010)   $(0.014)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ...   $ 0.274    $ 0.305   $ 0.309    $ 0.313    $ 1.201
</TABLE>



<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31, 1995
                                     ---------------------------------------------------
                                                         (UNAUDITED)

                                      FIRST     SECOND      THIRD     FOURTH
                                     QUARTER    QUARTER    QUARTER    QUARTER     TOTAL
                                     -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>    
OPERATING INCOME .................   $ 4,694    $ 5,327    $ 5,634    $ 5,607    $21,262

NET OPERATING INCOME .............   $ 2,520    $ 2,883    $ 3,154    $ 3,164    $11,721

NET GAIN (LOSS) ON INVESTMENTS ...   $   (11)   $   (77)   $  (188)   $   (83)   $  (359)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ...   $ 2,509    $ 2,806    $ 2,966    $ 3,081    $11,362

<CAPTION>
----------------------------------------------------------------------------------------
                                             PER SHARE
----------------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>        <C>    
OPERATING INCOME .................   $ 0.438    $ 0.496    $ 0.523    $ 0.517    $ 1.974

NET OPERATING INCOME .............   $ 0.235    $ 0.268    $ 0.293    $ 0.292    $ 1.088

NET GAIN (LOSS) ON INVESTMENTS ...   $(0.001)   $(0.007)   $(0.017)   $(0.008)   $(0.033)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ...   $ 0.234    $ 0.261    $ 0.276    $ 0.284    $ 1.055
</TABLE>




                                      F-3
<PAGE>   27

                       REPORT OF INDEPENDENT ACCOUNTANTS


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


We have audited the accompanying consolidated balance sheets of PMC
Capital, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 and the
financial highlights for each of the five years in the period ended December
31, 1996. We have also audited the accompanying consolidated schedule of
investments as of December 31, 1996. These financial statements and the
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included the examination or
confirmation of securities owned as of December 31, 1996 and 1995. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements and financial
highlights referred to above present fairly, in all material respects, the
consolidated financial position of PMC Capital, Inc. and subsidiaries as of
December 31, 1996 and 1995, the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, and the financial highlights for each of the five years in the period
ended December 31, 1996, and the consolidated schedule of investments as of
December 31, 1996, in conformity with generally accepted accounting
principles.

Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and the related consolidating statements of
income, cash flows, and shareholders' equity are presented for purposes of
additional analysis rather than to present the financial position, results of
operations, and cash flows of the individual companies, and are not a
required part of the consolidated financial statements. The supplementary
consolidating 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.



                                                      COOPERS & LYBRAND L.L.P.

Dallas, Texas
March 5, 1997



                                      F-4


<PAGE>   28
--------------------------------------------------------------------------------
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                              FINANCIAL HIGHLIGHTS

--------------------------------------------------------------------------------

     The following financial highlights of the Company should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere on this Form 10-K. The financial highlights below provide
information about the Company's financial history. It uses the Company's 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. The
financial highlights have been audited by Coopers & Lybrand L.L.P., independent
accountants.

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                            --------------------------------------------------------
                                                              1996        1995        1994        1993        1992
                                                            --------    --------    --------    --------    --------
<S>                                                         <C>         <C>         <C>         <C>         <C>     
PER SHARE OPERATING PERFORMANCE (1):

   Net asset value, beginning of period .................   $   5.44    $   5.37    $   5.24    $   5.20    $   3.38
                                                            --------    --------    --------    --------    --------

   Net operating income .................................       1.21        1.09        0.83        0.92        0.83
   Net gains or losses on securities
     realized and unrealized (2) ........................       0.17        0.08        0.37        0.02        1.69
                                                            --------    --------    --------    --------    --------
       Total from investment operations .................       1.38        1.17        1.20        0.94        2.52
                                                            --------    --------    --------    --------    --------

   Less distributions:
     Preferred shareholder of consolidated subsidiary ...       0.02        0.02        0.01        0.01        0.01
     Common shareholders ................................       1.16        1.08        1.06        0.89        0.69
                                                            --------    --------    --------    --------    --------

       Total distributions ..............................       1.18        1.10        1.07        0.90        0.70
                                                            --------    --------    --------    --------    --------

   Net asset value, end of period .......................   $   5.64    $   5.44    $   5.37    $   5.24    $   5.20
                                                            ========    ========    ========    ========    ========

   Per share market value, end of period ................   $  14.00    $  12.63    $  13.50    $  14.50    $  13.25
                                                            ========    ========    ========    ========    ========

   Total investment return ..............................         20%          2%          0%         16%         43%
                                                            ========    ========    ========    ========    ========

RATIOS AND SUPPLEMENTAL DATA:
   Net assets, end of period (in thousands) .............   $ 62,903    $ 59,088    $ 57,371    $ 55,524    $ 54,839
                                                            ========    ========    ========    ========    ========
   Ratio of expenses to average net assets ..............         17%         16%         13%         11%         12%
                                                            ========    ========    ========    ========    ========
   Ratio of operating income to average net assets ......         22%         20%         16%         18%         18%
                                                            ========    ========    ========    ========    ========
   Ratio of net operating income and realized and
     unrealized gain (loss) on investments to
     average net assets .................................         22%         20%         21%         17%         17%
                                                            ========    ========    ========    ========    ========
   Portfolio turnover (3) ...............................         16%         30%         65%         54%         77%
                                                            ========    ========    ========    ========    ========
</TABLE>


FOOTNOTES:

(1)  The per share changes during the year are based on the 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.




                                      F-5
<PAGE>   29
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                       --------------------
                                                         1996        1995
                                                       --------    --------
<S>                                                    <C>         <C>     
                                 ASSETS
INVESTMENTS AT VALUE:
  Loans receivable, net ............................   $ 93,354    $110,499
  Cash equivalents .................................     49,677      31,135
  Investment in subsidiaries .......................      8,585          27
  Excess servicing asset, net ......................      6,429       7,514
  Restricted investments ...........................      1,229       1,785
  Real property owned ..............................        303           5
                                                       --------    --------

TOTAL INVESTMENTS ..................................    159,577     150,965
                                                       --------    --------

OTHER ASSETS:
  Receivable for loans sold ........................      2,508       4,371
  Due from unconsolidated subsidiaries .............      1,097       1,135
  Deferred charges, deposits and other assets ......        885       1,170
  Accrued interest receivable ......................        376         723
  Cash .............................................        340         439
  Property and equipment, net ......................        181         199
                                                       --------    --------

TOTAL OTHER ASSETS .................................      5,387       8,037
                                                       --------    --------

TOTAL ASSETS .......................................   $164,964    $159,002
                                                       ========    ========

                  LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
  SBA debentures payable ...........................   $ 44,570    $ 43,540
  Notes payable ....................................     35,000      35,001
  Accounts payable .................................      4,145       2,500
  Dividends payable ................................      3,635       3,596
  Allowance for credit losses on loans sold ........      1,533       2,523
  Borrower advances ................................      1,795       2,260
  Accrued interest payable .........................      1,442       1,434
  Due to unconsolidated subsidiaries ...............      1,076        --
  Deferred fee revenue .............................        419         779
  Other liabilities ................................      1,446       1,281
                                                       --------    --------

TOTAL LIABILITIES ..................................     95,061      92,914
                                                       --------    --------

COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)

CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ...........      7,000       7,000
                                                       --------    --------

SHAREHOLDERS' EQUITY:
  Common stock, authorized 30,000,000 shares
    of $.01 par value, 11,162,000 and 10,871,000
    shares issued and outstanding at
    December 31, 1996 and 1995, respectively .......        112         109
  Additional paid-in capital .......................     62,125      58,429
  Undistributed net operating income ...............      1,101       1,017
  Net unrealized depreciation on investments .......       (435)       (467)
                                                       --------    --------

                                                         62,903      59,088
                                                       --------    --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .........   $164,964    $159,002
                                                       ========    ========

NET ASSET VALUE PER COMMON SHARE ...................   $   5.64    $   5.44
                                                       ========    ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-6
<PAGE>   30
                       PMC CAPITAL INC. AND SUBSIDIARIES
                      CONSOLIDATED SCHEDULE OF INVESTMENTS
                               DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                      RETAINED LOANS                     SERVICED LOANS (2)
                                       -------------------------------------------   -------------------------
                                       NUMBER                                        NUMBER
                                         OF                                           OF
             CATEGORY/ISSUER (1)       LOANS    VALUE      %        COST       %     LOANS      COST       %
             -------------------       ------  -------   -----    --------   -----   ------   --------   -----
<S>                                      <C>   <C>       <C>      <C>        <C>        <C>   <C>        <C>   
LOANS TO SMALL BUSINESS CONCERNS (3):
   SMALL BUSINESS LENDING COMPANY LOANS:
   FIRST WESTERN SBLC, INC. AND SUBSIDIARY
     Hotels and motels .............     159   $20,280    21.7%   $ 21,652    22.4%     159   $109,943    39.7%
     Gasoline / service stations ...      20       576     0.6%        635     0.7%      20      5,776     2.1%
     Restaurants ...................      83     2,166     2.3%      2,358     2.4%      83     15,387     5.6%
     Laundromats ...................      14       126     0.1%        135     0.1%      14      1,320     0.5%
     Retail, other .................      72       754     0.8%        818     0.9%      72      7,268     2.6%
     Health care ...................      10        37      --          40      --       10        679     0.2%
     Food and grocery stores .......      16       244     0.3%        263     0.3%      16      4,326     1.6%
     Services ......................      80     1,069     1.2%      1,206     1.2%      80     11,175     4.0%
     Manufacturing .................      17       789     0.9%        795     0.8%      17      4,204     1.5%
     Wholesale .....................      24       237     0.3%        293     0.3%      24      4,577     1.7%
     Car washes ....................       4        27      --          28      --        4      1,231     0.4%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   Total ...........................     499    26,305    28.2%     28,223    29.1%     499    165,886    59.9%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   SMALL BUSINESS INVESTMENT COMPANY LOANS:
   WESTERN FINANCIAL CAPITAL CORPORATION
     Hotels and motels .............      17     8,326     8.9%      8,550     8.8%      26     16,069     5.8%
     Gasoline / service stations ...       1       345     0.4%        345     0.4%       4      1,459     0.5%
     Restaurants ...................      --        --      --          --      --        1        196     0.1%
     Retail, other .................       4     2,431     2.6%      2,504     2.6%       6      2,651     1.0%
     Services ......................      11     1,538     1.6%      1,570     1.6%      16      2,458     0.9%
     Health care ...................      35       923     1.0%      1,006     1.0%      36      1,059     0.4%
     Food and grocery stores .......       2       307     0.3%        307     0.3%       2        307     0.1%
     Laundromats ...................       1        85     0.1%         85     0.1%       1         85      --
     Manufacturing .................       2       344     0.4%        344     0.4%       2        344     0.1%
     Other notes receivable ........       2       114     0.1%        147     0.2%       5        325     0.1%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   Total ...........................      75    14,413    15.4%     14,858    15.4%      99     24,953     9.0%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY LOANS:
   PMC INVESTMENT CORPORATION
     Hotels and motels .............      37    23,464    25.1%     24,011    24.8%      64     43,648    15.8%
     Gasoline / service stations ...       5     2,041     2.2%      2,097     2.1%       7      3,223     1.2%
     Restaurants ...................       1       296     0.3%        299     0.3%       2        960     0.3%
     Retail, other .................       1        60     0.1%         61     0.1%       1         61      --
     Services ......................       2       173     0.2%        173     0.2%       2        173     0.1%
     Health care ...................      20       670     0.7%        779     0.8%      20        779     0.3%
     Food and grocery stores .......       5     1,124     1.2%      1,147     1.2%       7      1,940     0.6%
     Other notes receivable ........       2       734     0.8%        768     0.8%       2        869     0.3%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   Total ...........................      73    28,562    30.6%     29,335    30.3%     105     51,653    18.6%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   COMMERCIAL LOANS:
   PMC CAPITAL, INC.
     Hotels and motels .............      30    19,720    21.1%     19,717    20.4%      43     28,727    10.4%
     Gasoline / service stations ...       1       320     0.3%        323     0.3%       1        323     0.1%
     Restaurants ...................       1       168     0.2%        169     0.2%       1        169     0.1%
     Retail centers and other ......       4     3,066     3.3%      3,408     3.5%       5      4,474     1.6%
     Apartment complex .............       1       800     0.9%        811     0.8%       1        811     0.3%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   Total ...........................      37    24,074    25.8%     24,428    25.2%      51     34,504    12.5%
                                       -----   -------   -----    --------   -----    -----   --------   -----

   TOTAL LOANS RECEIVABLE (4) ......     684   $93,354   100.0%   $ 96,844   100.0%     754   $276,996   100.0%
                                       =====   =======   =====    ========   =====    =====   ========   =====
</TABLE>

                            (Continued on next page)




                                      F-7
<PAGE>   31
                       PMC CAPITAL INC. AND SUBSIDIARIES
                      CONSOLIDATED SCHEDULE OF INVESTMENTS
                               DECEMBER 31, 1996
                                  (CONTINUED)



<TABLE>
<CAPTION>
     CATEGORY/ISSUER                                                     VALUE      %        COST       %
     ---------------                                                   --------   -----    --------   -----
<S>                                                                    <C>         <C>     <C>         <C>  
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) ...........................   $ 93,354    58.5%   $ 96,844    59.4%
                                                                       --------   -----    --------   -----

MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
     Certificates of deposit (6) ...................................      1,287     0.8%      1,287     0.8%
     Bank money market saving accounts .............................     24,263    15.2%     24,263    14.9%
     SunTrust, overnight repo account ..............................      1,745     1.1%      1,745     1.1%
     Short-term government agency securities .......................      9,527     5.9%      9,527     5.8%
     Dreyfus, Cash Management Plus money market fund ...............      3,021     1.9%      3,021     1.9%
     Goldman Sachs,  Prime Obligation money market fund ............      5,398     3.4%      5,398     3.3%
     Goldman Sachs,  Money Market Portfolio money market fund ......      4,436     2.8%      4,436     2.7%
                                                                       --------   -----    --------   -----

   Total money market and fund deposit accounts ....................     49,677    31.1%     49,677    30.5%
                                                                       --------   -----    --------   -----

INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
     Investment in PMC Limited Partnership .........................      8,205     5.1%      8,205     5.0%
     Investment in PMC Advisers, LTD ...............................         26      --          26      --
     Investment in PMC Capital Corp. 1996-A and PMC Trust 1996-A ...        262     0.2%        262     0.2%
     Investment in PMC Funding Corp ................................         92     0.1%         92     0.1%
                                                                       --------   -----    --------   -----

   Total investment in unconsolidated subsidiaries .................      8,585     5.4%      8,585     5.3%
                                                                       --------   -----    --------   -----

OTHER INVESTMENTS:
     Excess servicing asset ........................................      6,429     4.0%      6,429     3.9%
     SunBank Miami, restricted investments .........................      1,229     0.8%      1,229     0.7%
     Real property owned ...........................................        303     0.2%        303     0.2%
                                                                       --------   -----    --------   -----

   Total other investments .........................................      7,961     5.0%      7,961     4.8%
                                                                       --------   -----    --------   -----

TOTAL INVESTMENTS (7) ..............................................   $159,577   100.0%   $163,067   100.0%
                                                                       ========   =====    ========   =====
</TABLE>

(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
     ($122,061,000), the loans contributed to the Partnership ($42,384,000),
     loan participations ($105,000) and the unguaranteed portion of First
     Western loans sold in 1994 ($15,602,000). The balance does not include
     approximately $93 million of loan portfolio serviced on behalf of PMC
     Commercial Trust.

(3)  Interest rates on loans receivable range from 8.0% to 14.9%.

(4)  Balances are at face value of loans, less discounts aggregating $2,452,000
     in accordance with Emerging Issues Task Force 88-11, discounts on
     purchased loans of $413,000, deferred fee revenue of $960,000 and reserves
     of $435,000.

(5)  Interest or dividend rates on money market and fund deposit accounts range
     from 4.8% to 6.1%.

(6)  Interest rates on certificates of deposit range from 5.2% to 5.6%. All
     certificates held by either PMC or any of its subsidiaries are less than
     $100,000 in any one institution, generally have original maturities of 90
     days and are considered to be cash equivalents.

(7)  The aggregate cost of investments for Federal income tax purposes is
     $160,972,000.

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-8
<PAGE>   32
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                               --------------------------------
                                                                 1996        1995        1994
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>     
INVESTMENT INCOME:
  Interest .................................................   $ 18,571    $ 16,330    $ 11,952
  Premium income ...........................................      1,942       2,847       2,728
  Other investment income, net .............................        608         368         303
                                                               --------    --------    --------

Total investment income ....................................     21,121      19,545      14,983

Other income, net ..........................................      2,331       1,795       1,467
Equity in income (loss) of unconsolidated entities .........        369         (78)       --  
                                                               --------    --------    --------

Total income ...............................................     23,821      21,262      16,450
                                                               --------    --------    --------

EXPENSES:
  Interest .................................................      5,708       5,049       3,615
  Salaries and related benefits ............................      3,180       2,778       2,552
  General and administrative ...............................        843       1,053         900
  Profit sharing plan ......................................        217         190         168
  Rent .....................................................        213         203         176
  Legal and accounting .....................................        149         152          76
  Small Business Administration fees .......................         99          77          48
  Directors and shareholders expense .......................         45          39          43
                                                               --------    --------    --------

Total expenses .............................................     10,454       9,541       7,578
                                                               --------    --------    --------


Net  operating income ......................................     13,367      11,721       8,872
                                                               --------    --------    --------

REALIZED AND UNREALIZED GAIN (LOSS)
  ON INVESTMENTS:
    Loans written-off ......................................       (214)       (309)       (406)
    Recoveries on loans written-off ........................         35          40          68
    Sale of assets .........................................       --          --         3,346
    Change in unrealized appreciation
      (depreciation) on investments ........................         32         (90)        143
                                                               --------    --------    --------

Total realized and unrealized gain (loss) on investments ...       (147)       (359)      3,151
                                                               --------    --------    --------

NET OPERATING INCOME AND REALIZED AND UNREALIZED
  GAIN (LOSS) ON INVESTMENTS ...............................   $ 13,220    $ 11,362    $ 12,023
                                                               ========    ========    ========


PREFERRED DIVIDENDS ........................................   $    251    $    222    $    112
                                                               ========    ========    ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .................     11,002      10,768      10,650
                                                               ========    ========    ========

EARNINGS PER COMMON SHARE ..................................   $   1.18    $   1.03    $   1.12
                                                               ========    ========    ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-9
<PAGE>   33
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    NET
                                                              UNDISTRIBUTED     UNREALIZED
                                                 ADDITIONAL        NET         DEPRECIATION
                                        COMMON    PAID-IN       OPERATING           ON
                                        STOCK     CAPITAL        INCOME         INVESTMENTS      TOTAL
                                        ------   ----------   -------------    ------------    ---------
<S>                                     <C>      <C>          <C>              <C>             <C>      
BALANCE, JANUARY 1, 1994 ............   $  106   $   55,074   $         863    $       (520)   $  55,523


Issuance of common stock pursuant
  to dividend reinvestment and cash 
  purchase plan, 81,345 shares ......        1        1,180            --              --          1,181

Net income ..........................     --           --            11,880             143       12,023

Dividends:

  Preferred .........................     --           --              (112)           --           (112)

  Common ($1.06 per common share) ...     --           --           (11,244)           --        (11,244)
                                        ------   ----------   -------------    ------------    ---------

BALANCE, DECEMBER 31, 1994 ..........      107       56,254           1,387            (377)      57,371

Issuance of common stock pursuant
  to dividend reinvestment and cash
  purchase plan, 187,005 shares .....        2        2,175            --              --          2,177

Net income ..........................     --           --            11,452             (90)      11,362

Dividends:

  Preferred .........................     --           --              (222)           --           (222)

  Common ($1.08 per common share) ...     --           --           (11,600)           --        (11,600)
                                        ------   ----------   -------------    ------------    ---------

BALANCE, DECEMBER 31, 1995 ..........      109       58,429           1,017            (467)      59,088

Issuance of common stock pursuant
  to dividend reinvestment and cash
  purchase plan, 291,042 shares .....        3        3,696            --              --          3,699

Net income ..........................     --           --            13,188              32       13,220

Dividends:

  Preferred .........................     --           --              (251)           --           (251)

  Common ($1.16 per common share) ...     --           --           (12,853)           --        (12,853)
                                        ------   ----------   -------------    ------------    ---------

BALANCE, DECEMBER 31, 1996 ..........   $  112   $   62,125   $       1,101    $       (435)   $  62,903
                                        ======   ==========   =============    ============    =========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS




                                      F-10
<PAGE>   34
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                                       --------------------------------
                                                                         1996        1995        1994
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net operating income and realized and unrealized
    gain (loss) on investments .....................................   $ 13,220    $ 11,362    $ 12,023
  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 ...................................    (21,915)    (30,468)    (32,249)
     Proceeds from sale of guaranteed loans ........................     19,988      30,299      32,989
     Change in unrealized depreciation on investments
       and loans written-off .......................................        182         359         196
     Unrealized premium income, net ................................         (5)         80           5
     Depreciation and amortization .................................      1,084       1,142       1,642
     Accretion of loan discount and deferred fees ..................       (957)       (799)       (803)
     Deferred fees collected .......................................        785       1,050       1,004
     (Gain) loss on sale of assets .................................       --            26         (43)
     Gain on structured sale of loans ..............................       --          --        (3,346)
     Equity in (income) loss of unconsolidated subsidiaries ........       (369)         78        --
     Net change in operating assets and liabilities:
         Accrued interest receivable ...............................        347        (298)        (45)
         Other assets ..............................................        357        (166)        460
         Accrued interest payable ..................................          8         401         202
         Borrower advances .........................................       (465)       (694)        371
         Other liabilities .........................................      1,812         503       1,485
                                                                       --------    --------    --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................     14,072      12,875      13,891
                                                                       --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Loans funded .....................................................    (48,239)    (47,098)    (43,100)
  Principal collected and other adjustments ........................     22,647      10,651      17,756
  Proceeds from structured sale of loans ...........................       --          --        24,844
  Purchase of furniture and fixtures and other assets ..............       (127)        (53)       (828)
  Purchase of government securities ................................       --        (3,942)     (4,856)
  Proceeds from maturities of government securities ................       --         8,947       3,000
  Proceeds from sale of assets .....................................       --           233       1,010
  Release of (investment in) restricted cash .......................        556        (251)     (1,533)
  Investment in unconsolidated subsidiaries ........................       (893)       (400)       --
                                                                       --------    --------    --------
NET CASH USED IN INVESTING ACTIVITIES ..............................    (26,056)    (31,913)     (3,707)
                                                                       --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance or assumption of SBA debentures ..........        941      15,000       6,000
   Proceeds from issuance of notes payable .........................       --        10,000        --
   Proceeds from issuance of common stock ..........................      2,834       1,399         535
   Proceeds from issuance of preferred stock .......................       --         2,000       2,000
   Proceeds from unconsolidated subsidiary .........................     37,803        --          --
   Payment of dividends on common stock ............................    (11,935)    (11,189)     (9,774)
   Payment of dividends on preferred stock .........................       (250)       (204)        (67)
   Advances from (to) unconsolidated affiliates, net ...............      1,114         357        (370)
   Payment of issuance costs on notes and debentures ...............        (80)       (447)       (158)
                                                                       --------    --------    --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................     30,427      16,916      (1,834)
                                                                       --------    --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...............     18,443      (2,122)      8,350

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................     31,574      33,696      25,346
                                                                       --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR .............................   $ 50,017    $ 31,574    $ 33,696
                                                                       ========    ========    ========

SUPPLEMENTAL DISCLOSURE:
   Interest paid ...................................................   $  5,433    $  4,648    $  3,413
                                                                       ========    ========    ========

   Dividends reinvested ............................................   $    880    $    777    $    646
                                                                       ========    ========    ========

   Loans receivable acquired in exchange for SBA debentures ........   $    158    $  2,109    $   --
                                                                       ========    ========    ========

   Reclassification from loans receivable to real property owned ...   $    453    $     65    $    649
                                                                       ========    ========    ========

   Loans to facilitate sale of real property owned .................   $   --      $     85    $  1,345
                                                                       ========    ========    ========

   Loans contributed to unconsolidated subsidiary, net .............   $ 45,145    $   --      $   --
                                                                       ========    ========    ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-11
<PAGE>   35
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

PMC Capital, Inc. ("PMC" or "PMC Capital") is a diversified, closed-end
management investment company that has elected to operate as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
PMC engages in the business of originating loans to small businesses either
directly or through its three principal subsidiaries: First Western SBLC, Inc.
("First Western"), PMC Investment Corporation ("PMIC") and Western Financial
Capital Corporation ("Western Financial"). First Western, PMIC and Western
Financial are registered under the 1940 Act as diversified, closed-end
management investment companies. In addition, PMC is either directly or
indirectly the sole shareholder or partner of PMC Advisers, LTD ("PMC
Advisers"), PMC Funding Corp. ("PMC Funding"), PMC Capital Corp. 1996-A ("PMC
Capital Corp."), PMC Trust 1996-A and PMC Capital Limited Partnership ( the
"Partnership"). PMC has elected to be taxed as a regulated investment company
and distributes substantially all of its taxable income as dividends to
shareholders.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of PMC and its
wholly owned regulated investment company subsidiaries (collectively, the
"Company"). Intercompany transactions have been eliminated in consolidation.

The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with Federal securities laws.

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 7(a) Program (the "7(a)
Program"). While the eligibility requirements of the 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 (other than with respect to certain industries where eligibility is
determined based on the number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed the greater of
25% of the loan amount or $50,000 and (iii) the maximum aggregate SBA loan
guarantees to a borrower cannot exceed $750,000.

PMIC is a licensed specialized small business investment company ("SSBIC")
under the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC uses
long-term funds provided by the SBA, together with its own capital, to provide
long-term, fixed-rate collateralized loans to eligible small businesses owned
by "disadvantaged" persons, as defined under the regulations of the SBA. As an
SSBIC, PMIC was eligible to obtain long-term, fixed-rate funding, generally at
below-market rates, from the SBA through the issuance of debentures (which are
guaranteed by the SBA and on which the interest rate is reduced through an SBA
subsidy by 3% during the first five years) and preferred stock.

Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides fixed-rate loans to borrowers whether or not they
qualify as "disadvantaged". As an SBIC, Western Financial is eligible to obtain
long-term, fixed-rate funding, generally at below-market rates, from the SBA
through the issuance of debentures.

PMC 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 7(a) Program or SBIC programs.

UNCONSOLIDATED ENTITIES

PMC Advisers, organized in July 1993, is a registered investment advisor under
the Investment Advisers Act of 1940 which acts as the investment advisor for
PMC Commercial Trust ("PMC Commercial" or the "Trust"), a Texas real estate
investment trust and an affiliate of PMC Capital.




                                      F-12



<PAGE>   36



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


NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.

The Partnership was formed as a Delaware limited partnership in November 1996
to act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt
through a private placement.

PMC Capital Corp. is a Delaware corporation formed in November 1996 to be the
independent trustee of the general partner of the Partnership. PMC Trust 1996-A
is a Delaware business trust formed in November 1996 to be the general partner
of the Partnership.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

VALUATION OF INVESTMENTS

Loans receivable are carried at the Board of Directors' estimate of fair value.
The Board of Directors has estimated the fair value of loans receivable to be
the loan principal balance less deferred fees and discounts, 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. Changes in market
interest rates are not considered in determining the estimate of fair value.

Loans, including impaired loans, are generally classified as nonaccrual 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 nonaccrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.

When selling the SBA-guaranteed portion of loans, the basis of the retained
portion of the loans has been reduced by the differential between the face
amount of the unguaranteed portion of the loans and the value as determined in
accordance with the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") 88-11. This difference being the Retained Loan
Discount. At the time of sale, premium income has been reduced by the Retained
Loan Discount. Unless the underlying loans are paid in full 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 as a reduction of cost.

Excess servicing related to the sale of the guaranteed portion of SBA loans is
carried at the Board of Directors' estimate of fair value at the time of the
related loan sale and amortized on a pool basis over the estimated life of the
underlying pool of loans.

For those sales of the unguaranteed portion of SBA loans, an allowance has been
established which represents the Board of Directors' estimate of probable
credit losses to be incurred over the lives of the loans sold.

Deferred fees consist of non-refundable fees less direct loan origination
costs. These fees are being recognized over the expected life of the related
loan as an adjustment of yield.

Real property owned is carried at the Board of Directors' estimate of fair
value, based upon appraisals and other factors.



                                      F-13




<PAGE>   37



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


NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Cash equivalents are carried at value, which approximates cost.

VALUATION OF DEBT

Debt incurred by the Company is valued at cost. Changes in market interest
rates are not considered in determining fair value as determined by the Board
of Directors.

PROPERTY AND EQUIPMENT

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

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 calculated
also includes loans written-off or charged-down during the year and recoveries
of loans written-off or charged-down in prior years.

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

Realized gains on the sale of the unguaranteed portion of SBA loans are
recognized based upon the difference between the sales price as adjusted for
any excess servicing (less any allowance for credit losses) and the carrying
value of the assets (including the Retained Loan Discount).

INTEREST INCOME

Interest income on loans is accrued as earned. The accrual of interest is
generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is recognized on
the cash basis.

Interest income includes the interest rate spread on loans sold to the
secondary market or through the securitization and sale of the unguaranteed
portion of SBA loans less the amortization of any excess servicing asset.

PREMIUM INCOME

For loans originated by the SBLC, gain on the sale of the SBA guaranteed
portion of such loans to the secondary market has been adjusted to reflect a
normal service fee for the future servicing rights retained by the Company.
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 in accordance with EITF 88-11. The sale price includes the value
attributable to any excess servicing spread retained by the Company plus any
cash received.

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.

FEDERAL INCOME TAXES

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

Any dividends declared by the Company 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 it were received by the shareholders on December 31 of the year declared.




                                      F-14



<PAGE>   38



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

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

         DISTRIBUTIONS TO SHAREHOLDERS

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

         STATEMENT OF CASH FLOWS

         The Company considers all highly liquid investments purchased with an
         original maturity of three months or less to be cash equivalents for
         purposes of the consolidated statement of cash flows.

         EXCESS SERVICING ASSET

         During 1995, the EITF reached a consensus on Issue No. 94-9,
         "Determining a Normal Servicing Fee Rate for the Sale of an SBA Loan."
         This consensus provides that for purposes of allocating the recorded
         investment in a loan between the portion of the loan sold and the
         portion retained, including any excess servicing asset, a normal
         servicing fee of 40 basis points should be used. The Company had
         historically used 50 basis points as a normal servicing fee. The
         effect of this change in estimate was not material to the consolidated
         financial statements during the year ended December 31, 1995.

         STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 122

         During May 1995, the FASB issued SFAS No. 122, "Accounting for
         Mortgage Servicing Rights," an amendment to SFAS No. 65. The Company
         elected to adopt this standard for its financial statement reporting
         beginning in 1996. SFAS No. 122 prohibits retroactive application.
         Accordingly, the Company's financial statement reporting for years
         prior to 1996 was accounted for under SFAS No. 65, the predecessor
         Statement to SFAS No. 122. The impact of SFAS No. 122 to the
         consolidated financial statements was not significant to operations
         during the year ended December 31, 1996.

         SFAS NO. 125

         In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer
         and Servicing of Financial Assets and Extinguishments of Liabilities."
         Those standards have been established to provide a consistent
         application of accounting based on a financial-components approach
         which distinguishes the transfer of financial assets that are sales
         from those that are secured borrowings. This approach is based upon
         control of the related assets, whereby after a transfer of financial
         assets, an entity recognizes the financial and servicing assets it
         controls and the liabilities it has incurred, and derecognizes
         financial assets when control has been surrendered and liabilities are
         extinguished. SFAS No. 125 is effective for transfer and servicing of
         financial assets and extinguishments of liabilities occurring after
         December 31, 1996, and may only be applied prospectively.

         SFAS NO. 128

         In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS
         No. 128 specifies the computation, presentation, and disclosure
         requirements for earnings per share. SFAS No. 128 is designed to
         improve the earnings per share information provided in financial
         statements by simplifying the existing computational guidelines,
         revising the disclosure requirements and increasing the comparability
         of earnings per share data. SFAS No. 128 is effective for financial
         statements for periods ending after December 15, 1997. In the opinion
         of management, the effect of this pronouncement on earnings per share
         is not considered significant.

         SFAS NO. 129

         In February 1997, the FASB issued SFAS No. 129, "Disclosure of
         Information About Capital Structure." SFAS No. 129 requires certain
         disclosure about an entity's capital structure. SFAS No. 129 is
         effective for financial statements for periods ending after December
         15, 1997. In the opinion of management, the effect of this 
         pronouncement on the Company's financial position or results of
         operations is not considered significant.

         RECLASSIFICATION

         Certain prior period amounts have been reclassified to conform to
         current year presentation.




                                      F-15



<PAGE>   39



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

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 90% 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.
         Funding for the 7(a) Program depends on the annual appropriations by
         the U.S. Congress. At December 31, 1996, included in loans receivable
         are approximately $3.8 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 $137.7 million and $150.1 million
         at December 31, 1996 and 1995, respectively.

         First Western's loans: (i) range in original principal amount from
         $30,000 to $1,400,000, (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.

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

         PMC 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 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 and (iv) are generally guaranteed by the principals
         of the borrower.

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


<TABLE>
<CAPTION>
                               Percentage of Loan Portfolio
         State                          December 31,
         -----                ----------------------------
                                  1996         1995
                                 ------       -----
         <S>                     <C>          <C>
         Texas                     38%          41%
         Florida                   13%          13%
         Georgia                   11%          10%
         Other                     38%          36%
                                  ---          ---
                                  100%         100%
                                  ===          === 
</TABLE>

         The activity in net unrealized depreciation on investments is as
follows:

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                      -------------------------
                                                        1996            1995
                                                      ---------       ---------
<S>                                                   <C>             <C>      
         Balance, beginning of period ..........      $ 467,000       $ 377,000
         Provision for losses ..................        182,000         399,000
         Loans written-off .....................       (214,000)       (309,000)
                                                      ---------       ---------
         Balance, end of period ................      $ 435,000       $ 467,000
                                                      =========       =========
</TABLE>



                                      F-16
<PAGE>   40



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

NOTE 2.   LOANS RECEIVABLE: (CONTINUED)

         Loans receivable with an aggregate retained balance of $1.0 million
         and $1.8 million were greater than 60 days past due, litigation
         against the borrowers has commenced, or the loans are in the process
         of liquidation at December 31, 1996 and 1995, respectively.

         At December 31, 1996 and 1995, the recorded investment in loans
         identified as impaired in accordance with SFAS No. 114 totaled $1.0
         million and $1.5 million, respectively. Of this total, at December 31,
         1996 and 1995, approximately $80,000 and $20,000, respectively,
         related to loans with no valuation reserve, since the estimated fair
         value of the collateral for each loan exceeds the respective loan
         balance. Approximately $900,000 and $1.5 million of these loans at
         December 31, 1996 and 1995, have a corresponding valuation allowance
         of $412,000 and $446,000, respectively. At December 31, 1996 and 1995,
         the Company has recognized $22,000 and $21,000 in valuation allowances
         on identified problem loans of $317,000 and $300,000, respectively,
         which were not deemed impaired. The Company 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 $113,000 and $168,000, respectively, would have been
         recognized during the years ended December 31, 1996 and 1995.

         In addition to the SBA Guaranteed Sales, First Western sells through
         separate transactions, the unguaranteed portion of certain of its
         originated loans through private placements ("SBA Unguaranteed
         Sales"). First Western retains the right to service all such loans.
         The guaranteed portions are sold to either dealers in government
         guaranteed loans or institutional investors and certain of the
         unguaranteed portions have been sold in privately negotiated
         transactions between First Western and the purchaser.

         PMC Capital contributed approximately $45.7 million (aggregate
         principal balance due, including $34.4 million in loans transferred
         from PMIC and Western Financial to PMC Capital) of loans to the
         Partnership without recourse. (See Note 15.)

NOTE 3.  EXCESS SERVICING ASSET:

         By retaining the right to service the loan, First Western earns an
         interest rate spread equal to the difference between the interest rate
         on the loan and the interest rate paid to the purchaser on the sold
         portion (this difference being the "Servicing Spread"). On SBA
         Guaranteed Sales, First Western or PMC recognizes premium income by
         receiving either a cash premium, an excess servicing right on the sale
         or a combination of these elements. On SBA Guaranteed Sales that
         involve receiving the maximum premium, First Western retains the
         minimum Servicing Spread of 1% required by SBA regulations ("SBA
         Minimum Servicing"). When receiving the maximum premium, PMC or First
         Western would recognize as premium income the difference between the
         amount received from the purchaser and the aggregate of the
         outstanding principal amount of the guaranteed portion plus any value
         of the Servicing Spread in excess of normal servicing (the "Excess
         Servicing Spread").

         On SBA Guaranteed Sales, First Western recognizes premium income equal
         to the value of the Excess Servicing Spread, plus the difference, if
         any, between the amount received from the purchaser and the
         outstanding principal amount of the guaranteed portion sold as valued
         in accordance with EITF 88-11.

         The Board of Directors estimates the value of the Excess Servicing
         Spread based upon various factors including premiums realized on
         comparable transactions in the secondary market with a 1% servicing
         fee being retained, comparable market bids with normal servicing rates
         on SBA loans and the likelihood of prepayment. The value of the Excess
         Servicing Spread is recognized as premium income at the time of the
         sale and is concurrently capitalized as an asset on the Company's
         balance sheet (the "Excess Servicing Asset"), which is then amortized
         over the estimated life of the loan. In using this valuation method,
         the Company incorporated assumptions that market participants would
         use in estimating future net servicing income which included estimates
         of the cost of servicing per loan, the discount rate, prepayment
         speeds and default rates. During 1995, the Company completed a
         reassessment of the method used to amortize the Excess Servicing
         Asset. Historically, the Company had amortized the Excess Servicing




                                      F-17



<PAGE>   41
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.  EXCESS SERVICING ASSET: (CONTINUED)

         Asset based upon the estimated life for each loan at the time of sale,
         expectation of prepayments and other considerations. When a loan was
         paid in full, the remaining unamortized Excess Servicing Asset, if
         any, was charged against income. Considering the above factors and the
         Company's historical portfolio performance, the Company extended to
         the expected remaining life of the related loans, on a pooled basis,
         the period over which the remaining Excess Servicing Asset would be
         amortized for loans originated and sold prior to January 1, 1995. The
         Excess Servicing Asset is amortized on an accelerated method over the
         estimated remaining lives of the related pool assets. There can be no
         assurance of the accuracy of management's prepayment estimates. If
         prepayments occur at a faster rate than expected, the amortization of
         the Excess Servicing Asset will be accelerated as a charge to
         earnings. If actual prepayments occur at a slower rate than estimated,
         cash flows from the Excess Servicing Spread would exceed previously
         expected amounts and total income in future periods would be enhanced.

         The sale of the unguaranteed portion of SBA loans has also generated
         an Excess Servicing Asset to the extent that the Servicing Spread
         exceeds the normal servicing fee. (See Note 8.)

         Pursuant to SFAS No. 122, impairment of the Excess Servicing Asset is
         measured based on its fair value. In measuring impairment at December
         31, 1996, the servicing portfolio was evaluated based upon the
         predominant risk characteristics which the Company has determined to
         be prepayment and payment default risks. The Company evaluated the
         serviced portfolio for both the Excess Servicing Asset related to SBA
         Guaranteed Sales and related to the sale of the unguaranteed portion
         of SBA loans in 1994 (the "SBA Unguaranteed Sale"). Based upon current
         prepayment assumptions, estimates of default rates and a discount
         factor considering the current interest rate environment, it has been
         determined that there was no impairment reserve required as of
         December 31, 1996. As a result of an increase in the rate of
         prepayment of loans during 1996, the Company accelerated the
         amortization of its Excess Servicing Asset related to the SBA
         Unguaranteed Sale by $780,000. The related allowance for credit losses
         on loans sold was also adjusted by a similar amount as a result of
         these prepayments. The acceleration of the Excess Servicing Asset
         amortization is included in the schedule below.

         The activity in the excess servicing asset is summarized as follows:

<TABLE>
<CAPTION>

                                             Years Ended December 31,        
                                    ----------------------------------------- 
                                        1996           1995           1994
                                    -----------    -----------    ----------- 
<S>                                 <C>            <C>            <C>        
Balance, beginning of year ......   $ 7,514,000    $ 7,694,000    $ 5,108,000
Additions, net of allowances ....       707,000        791,000      4,078,000
Less:  amortization, net ........    (1,792,000)      (971,000)    (1,492,000)
                                    -----------    -----------    -----------
Balance, end of year ............   $ 6,429,000    $ 7,514,000    $ 7,694,000
                                    ===========    ===========    ===========
</TABLE>

         Additions in 1994 include $3,047,000 relating to the Excess Servicing
Spread from the SBA Unguaranteed Sale.

NOTE 4.  PROPERTY AND EQUIPMENT:

         At December 31, 1996 and 1995, property and equipment consisted of the
following:

<TABLE>
<CAPTION>

                                                  1996       1995
                                                --------   --------
<S>                                             <C>        <C>     
Furniture and equipment .....................   $319,000   $288,000
Leasehold improvements ......................    150,000    150,000
Automobiles .................................     13,000     13,000
                                                --------   --------
                                                 482,000    451,000
         Less:accumulated depreciation ......    301,000    252,000
                                                --------   --------
                                                $181,000   $199,000
                                                ========   ========
</TABLE>

         Depreciation and amortization expense for the years ended December 31,
         1996, 1995 and 1994 was approximately $49,000, $57,000 and $75,000,
         respectively.



                                      F-18
<PAGE>   42
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.  NOTES PAYABLE:

         PMC has a $15 million uncollateralized revolving credit facility which
         expires May 1998. Advances pursuant to the credit facility bear
         interest at the Company's option at the bank's prime rate less 50 basis
         points or the London Interbank Offering Rate (LIBOR) plus 175 basis
         points. The credit facility requires the Company to meet certain
         covenants, the most restrictive of which includes that the ratio of net
         charge-offs to net loans receivable will not exceed 2%, and the ratio
         of assets to senior debt (as defined in the note agreement) will not
         fall below 150%. At December 31, 1996, the Company had no amounts
         outstanding pursuant to this credit facility and the Company was in
         compliance with all covenants of this facility. At December 31, 1995,
         PMC had a $10 million revolving credit facility which expired in 1996.

         PMC has consummated $35 million in private placements of
         uncollateralized notes. These borrowings have been utilized to fund
         commitments of the non-SBA lending program. The notes require the
         Company 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 the Company's loan valuation reserve for any 12 month
         period must not exceed 3% of net loans receivable and (iii) the
         Company's consolidated earnings plus interest expense must exceed 150%
         of interest expense. At December 31, 1996, the Company was in
         compliance with all of the covenants of these notes. At December 31,
         1996 outstanding uncollateralized notes were as follows:

<TABLE>
<CAPTION>

                        Interest                                  Final
     Date                Rate              Amount                Maturity
-----------------   ----------------    --------------      -----------------
<S>                 <C>                 <C>                 <C>
  July 19, 1993          7.20%          $20,000,000(2)        July 19, 2001
December 15, 1993        6.97%            5,000,000         December 15, 2002
  April 19, 1995         8.60%            5,000,000           April 19, 2003
  April 19, 1995     LIBOR +1.3% (1)      5,000,000           April 19, 2004
                                        -----------
                                        $35,000,000
                                        ===========
</TABLE>


              (1) Reset quarterly, 6.83% at December 31, 1996.
              (2) Payable in three equal annual installments commencing July
                  19, 1999.

         Principal payments required on the notes at December 31, 1996, are as
         follows:

<TABLE>
<CAPTION>

                Year Ending         
                December 31,                 Amount
                ------------              -----------
                  <S>                      <C>       
                  1999                     $6,666,667
                  2000                      6,666,667
                  2001                      6,666,666
                  2002                      5,000,000
                  2003                      5,000,000
                  2004                      5,000,000
                                          -----------
                                          $35,000,000
                                          ===========
</TABLE>                            




                                      F-19
<PAGE>   43
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6.   SBA DEBENTURES PAYABLE:

         Debentures payable represent amounts due to the SBA as a result of
borrowing made pursuant to the SBIA.

         At December 31, 1996, the maturities, interest rates and principal
payments on the SBA debentures were as follows:

<TABLE>
<CAPTION>

                  Maturity Date            Interest Rate             Amount
              --------------------        ----------------       -----------
              <S>                         <C>                     <C>        
              February 1, 1997               (1)  7.950%         $ 2,480,000
              September 1, 1997              (2) 10.350%             800,000
              February 1, 1998                    8.850%           1,500,000
              August 18, 1999                (3)  8.125%           1,000,000
              September 1, 1999                   8.800%           2,500,000
              December 1, 1999               (2)  8.600%             650,000
              January 2, 2000                (4)  7.875%           3,000,000
              March 1, 2000                       9.350%           1,000,000
              June 1, 2000                   (2)  9.300%             300,000
              June 1, 2000                   (5)  9.300%           2,000,000
              June 1, 2000                   (6)  9.300%           1,030,000
              September 1, 2000                   9.600%           4,310,000
              December 1, 2002               (2)  7.510%             510,000
              September 1, 2004              (7)  5.200%           3,000,000
              September 1, 2004                   8.200%           3,000,000
              March 1, 2005                  (8)  4.840%           3,000,000
              June 1, 2005                   (9)  3.690%           5,000,000
              September 1, 2005             (10)  3.875%           7,000,000
              September 1, 2006                   7.590%           2,490,000
                                                                 -----------
                                                                 $44,570,000
                                                                 ===========
</TABLE>

         (1)      Paid off in February 1997.

         (2)      During April 1995, the Company assumed $2,260,000 in SBA
                  debentures from a non-affiliated small business investment
                  corporation in exchange for loans receivable of $2,109,062
                  and cash of $150,938. The loans acquired were initially
                  originated by the Company and a portion sold to the
                  non-affiliated small business investment corporation. All of
                  these loans were purchased at par and were performing
                  according to their terms at the time of reacquisition.

         (3)      The interest rate on this debenture was 5.125% through August
                  18, 1994, as a result of the subsidy program provided by the
                  SBA.

         (4)      The interest rate on this debenture was 4.875% through
                  January 2, 1995, as a result of the subsidy program provided
                  by the SBA.

         (5)      The interest rate on this debenture was 6.300% through June
                  1, 1995, as a result of the subsidy program provided by the
                  SBA.

         (6)      During May 1996, the Company assumed $1,030,000 in SBA
                  debentures from a non-affiliated SBIC in exchange for loans
                  receivable of approximately $200,000 and cash of
                  approximately $900,000. The loans acquired were initially
                  originated by the Company and a portion sold to the
                  non-affiliated SBIC. All of these loans were purchased at par
                  and were performing according to their terms at the time of
                  reacquisition.




                                      F-20



<PAGE>   44



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


NOTE 6.  SBA DEBENTURES PAYABLE: (CONTINUED)

         (7)      The interest rate will increase to 8.200% in September 1999
                  until maturity.

         (8)      The interest rate will increase to 7.840% in March 2000 until
                  maturity.

         (9)      The interest rate will increase to 6.690% in June 2000 until
                  maturity.

         (10)     The interest rate will increase to 6.875% in September 2000
                  until maturity.

NOTE 7.  COMMITMENTS AND CONTINGENCIES:

         OPERATING LEASES

         During 1991, the Company entered into an agreement to lease its
         corporate office space for a 15 year period from a corporation, a
         majority of whose principals are officers and directors of the
         Company. Leasehold improvements of $150,000 have been paid to the
         corporation for costs incurred during the build-out of the leased
         premises. The lease has been amended to allow the Company to terminate
         such lease without penalty upon 60 days written notice to the
         corporation. The Company has also entered into agreements to lease
         additional space in the same building for one year periods.

         The independent members of the Board of Directors decide on an annual
         basis whether PMC will continue the leases and the annual lease
         payment.

         At December 31, 1996, the Company has additional agreements to lease
         office space in Florida and Georgia.

         Rental expense amounted to approximately $213,000 , $203,000 and
         $176,000 during the years ended December 31, 1996, 1995 and 1994,
         respectively.

         Future minimum lease payments at December 31, 1996 are as follows:

<TABLE>
<CAPTION>

                Year Ending     
                December 31,                Amount
                ------------             -----------
                 <S>                     <C>       
                     1997                $  227,000
                     1998                   225,000
                     1999                   226,000
                     2000                   223,000
                     2001                   235,000
                     Thereafter           1,364,000
                                         ----------
                                         $2,500,000
                                         ==========
</TABLE>


         LOAN COMMITMENTS

         Loan commitments outstanding at December 31, 1996, to various
         prospective small business companies, including the unfunded portion
         of projects in the construction phase, amounted to approximately $45.9
         million. Of these commitments, $5.0 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 the Company's 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.




                                      F-21



<PAGE>   45



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

NOTE 7.  COMMITMENTS AND CONTINGENCIES: (CONTINUED)

         EMPLOYMENT AGREEMENTS
         The Company has employment contracts with certain of its officers for
         terms expiring June 1999. Annual remuneration during the term of the
         contracts range from $125,000 to $300,000. Future minimum payments
         under these contracts are as follows:


<TABLE>
<CAPTION>
              
                   Year Ending       
                   December 31,               Amount
                   ------------             ----------
                   <S>                      <C>
                       1997                 $1,148,000
                       1998                  1,075,000
                       1999                    538,000
                                            ----------
                                            $2,761,000
                                            ==========

</TABLE>
                                                         
                                                                            

         During the years ended December 31, 1996, 1995 and 1994 compensation
         to officers was approximately $1,382,000, $1,229,000 and $1,243,000,
         respectively.

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

NOTE 8.  CREDIT AND INTEREST RATE RISK:

         In connection with First Western's structured sale of a 94% portion of
         certain unguaranteed SBA loans during December 1994, the Company is
         subject to credit risk. Total proceeds from the sale amounted to $24.8
         million. Pursuant to the structured sale, the investors' protection
         from losses is provided by: (i) the subordination of the Company's
         right to receive payment on loans receivable totaling approximately
         $1.6 million at the time of sale ($1.0 million at December 31, 1996),
         (ii) the subordination of the Company's right to receive the Servicing
         Spread on those loans sold in the securitization ($1,335,000 at
         December 31, 1996, included in Excess Servicing Asset on the
         accompanying balance sheet) and (iii) cash deposits provided by the
         Company. At December 31, 1996, approximately $1,229,000 of cash
         deposits held in interest bearing accounts were restricted. In
         connection with this structured sale, a valuation reserve of $2.6
         million was established at the time of sale. At December 31, 1996 the
         valuation reserve was $1,533,000.

         In connection with the Company's investment in the Partnership, all
         payments of principal and interest on the loans contributed to the
         Partnership are to be deposited with the trustee and are used to pay
         the noteholders the required monthly principal and interest then due
         on the notes pursuant to the Trust Indenture (as defined below) prior
         to releasing any excess funds to the Partnership free and clear of the
         Trust Indenture. The Partnership's obligations to the noteholders are
         also collateralized by: (i) the differential between the outstanding
         principal balance remaining due on the underlying loans held by the
         Partnership and the balance due the noteholders, (ii) the reserve
         account established to provide liquidity to the noteholders ( the
         "Reserve Account") and (iii) money held in the operating accounts of
         the Partnership to the extent they are restricted pursuant to the
         terms of the trust indenture established by the noteholders, the
         Company and the Partnership (the "Trust Indenture"). The Trust
         Indenture provides for several covenants which would require, under
         certain circumstances, that the excess cash , after payment of the
         required principal and interest to the Partnership Noteholders (the
         "Excess Cash"), be retained in the Reserve Account until the covenants
         are in compliance. Of the assets of the Partnership at December 31,
         1996, approximately $280,000 was Excess Cash which was distributed to
         the Partners in January 1997.

         The Company has a fundamental policy that requires investment of at
         least 25% of its total assets in the lodging industry, and allows
         investment of up to 100% of total assets in this industry. At December
         31, 1996 and 1995, loans to businesses in the lodging industry
         comprised 44% and 55% of its total assets, respectively, and 77% and
         78% of



                                      F-22



<PAGE>   46



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

NOTE 8.  CREDIT AND INTEREST RATE RISK: (CONTINUED)

         its loans receivable, net, respectively. There can be no assurance
         that the Company will continue to experience the positive results it
         has historically acheived from these lending activities or that market
         conditions will enable the Company to maintain or increase this level
         of loan concentration. Any economic factors that negatively impact the
         lodging industry could have a material adverse effect on the business
         of the Company. Additionally, loans to businesses located in Texas,
         Florida and Georgia currently comprise approximately 38%, 13% and 11%
         of the Company's outstanding loan portfolio, respectively. A decline
         in economic conditions in any of these states may adversely affect the
         Company.

         Net income of the Company is effected by the spread between the rate
         at which it borrows funds and the rate at which it loans these funds.
         The portfolios of PMC Capital, Western Financial and PMIC have
         typically been long-term and at fixed rates and the borrowed funds of
         these companies are typically long-term and at fixed rates. First
         Western originates variable rate loans and has utilized equity capital
         of PMC Capital and a structured sale in 1994 to obtain funds necessary
         to originate loans. If the yield on loans originated by the Company
         with funds obtained from borrowings or the issuance of preferred stock
         fails to cover the cost of such funds, the Company's cash flow will be
         reduced. During periods of changing interest rates, interest rate
         mismatches could negatively impact the Company's net income, dividend
         yield and the market price of the Common Stock. Most of the fixed rate
         loans that the Company originates have prepayment penalties. If
         interest rates decline, the Company may experience significant
         prepayments. Such prepayments, as well as scheduled repayments, are
         likely to be reloaned or invested at lower rates, which may have an
         adverse effect on the Company's ability to maintain distributions at
         existing levels.

NOTE 9.  CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:

         PMIC 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.

         PMIC 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, 1996, 1995 and
         1994.

         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 approximately $160,000, $132,000
         and $22,000 were recognized on the 4% Preferred Stock during the years
         ended December 31, 1996, 1995 and 1994, 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 10. SHAREHOLDERS' EQUITY:

         The Company has a dividend reinvestment and cash purchase plan (the
         "Plan") for up to 1,000,000 shares of common stock. As amended,
         participants in the Plan have the option to reinvest all or a portion
         of dividends received plus an optional cash purchase of up to $10,000
         per month. The purchase price of the shares is 98% of the average of
         the high and low price of the common stock as published for the five
         trading days immediately prior to the dividend record date or prior to
         the optional cash payment purchase date, whichever is applicable.
         During the years ended December 31, 1996, 1995 and 1994, the Company
         issued 291,042, 187,005 and 81,345 shares of common stock pursuant to
         the Plan for proceeds (through cash and the reinvestment of dividends)
         of approximately $3.7 million, $2.2 million and $1.2 million,
         respectively.





                                      F-23



<PAGE>   47



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

NOTE 11. EARNINGS PER COMMON SHARE COMPUTATIONS:

         The computations of earnings per common share are based on the
         weighted average number of shares outstanding of the Company. 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 PMIC. Preferred stock dividend requirements
         were approximately $250,000, $222,000 and $112,000 during the years
         ended December 31, 1996, 1995 and 1994, respectively. The weighted
         average number of shares used in the computations of earnings per
         common share were 11.0 million, 10.8 million and 10.6 million for the
         years ended December 31, 1996, 1995 and 1994, respectively.

NOTE 12. BORROWER ADVANCES:

         The Company finances several projects during the construction phase.
         At December 31, 1996, the Company was in the process of funding
         approximately $15.1 million in construction projects, of which $5.9
         million in funding remained. As part of the monitoring process to
         verify that the borrowers' cash equity is utilized for its intended
         purpose, the Company deposits amounts received from the borrowers and
         releases the funds upon presentation of appropriate supporting
         documentation. The Company had approximately $1.8 million and $2.3
         million in funds held on behalf of borrowers at December 31, 1996 and
         1995, respectively.

NOTE 13. PROFIT SHARING PLAN:

         The Company has a profit sharing plan available to its full-time
         employees after one year of employment. Vesting increases ratably to
         100% after the sixth year of employment. Pursuant to the profit
         sharing plan, the Company has expensed approximately $217,000,
         $188,000 and $168,000 during the years ended December 31, 1996, 1995
         and 1994, respectively. Contributions to the profit sharing plan are
         at the discretion of the Board of Directors.

NOTE 14. RELATED PARTY TRANSACTIONS:

         Pursuant to agreements between PMC Capital and its wholly owned
         subsidiaries, during the three years in the period ended December 31,
         1996, PMC provided certain services to the subsidiaries at no cost.
         These services and costs include salaries, rent and other general
         corporate expenses. However, PMC retains all cash premiums on First
         Western's SBA Guaranteed Sales ($1,937,000, $2,927,000 and $2,734,000
         during the years ended December 31, 1996, 1995 and 1994, respectively)
         as compensation for these services and for the working capital
         provided by PMC Capital to First Western.

         During December 1993, PMC Advisers entered into an investment
         management agreement with the Trust. The officers and certain trust
         managers of the Trust are officers and directors of PMC. Pursuant to
         its agreement with PMC Advisers, through June 30, 1996 the Trust paid
         PMC Advisers a base annual servicing fee of 0.50% of the average
         assets (as defined in the agreement) of the Trust under management
         plus an advisory fee of 1% of the average invested assets (as defined
         in the agreement ) of the Trust. In addition, PMC Advisers earned an
         advisory fee up to 1% of the average invested assets upon meeting
         certain criteria in regards to investment returns to the Trust
         shareholders. All such advisory fees were reduced by 50% with respect
         to the value of average invested assets that exceed the beneficiaries'
         equity of the Trust as a result of leverage or the issuance of
         preferred shares.

         Effective July 1, 1996, the Investment Management Agreement was
         amended to include compensation to PMC Advisers for its assistance in
         any issuance of debt or equity securities for PMC Commercial. Such
         compensation includes a consulting fee based on (i) 12.5% of any
         offering fees incurred by PMC Commercial pursuant to the public
         offering or private placement of its common shares, and (ii) 50% of
         any issuance or placement fees incurred by PMC Commercial pursuant to
         the public offering or private placement of its debt securities or
         preferred shares of beneficial interest. Of the amount of servicing
         and advisory fees paid or payable to PMC Advisers as of December 31,
         1996, approximately $251,000 was earned pursuant to a public offering
         of common shares by PMC Commercial in July 1996.



                                      F-24



<PAGE>   48



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

NOTE 14. RELATED PARTY TRANSACTIONS: (CONTINUED)

         Pursuant to the amended Investment Management Agreement, the quarterly
         servicing and advisory fee (the "Base Fee") is based on the assets and
         capital structure of PMC Commercial. As defined in the Investment
         Management Agreement, the Base Fee is the sum of (i) 0.4167% (1.67% on
         an annual basis) of the lesser of (a) the average quarterly value of
         common equity capital or (b) the average quarterly value of all
         invested assets and (ii) 0.21875% (0.875% on an annual basis) of the
         difference between the average quarterly value of all invested assets
         and the average quarterly value of common equity capital. For purposes
         of calculating the Base Fee, the average quarterly value of common
         equity capital shall not be increased by the proceeds received from
         any public offering of common shares by PMC Commercial (other than
         pursuant to its dividend reinvestment plan or any employee/trust
         manager benefit plan) during the 180 calendar day period immediately
         following such public offering. In no event will the aggregate annual
         fees charged under the new agreement be greater than that which would
         have been charged had there been no revision to the investment
         management agreement.

         Pursuant to the applicable investment management agreement between PMC
         Advisers and PMC Commercial, PMC Advisers earned $1.6 million, $1.2
         million and $429,000 during the years ended December 31, 1996, 1995 and
         1994, respectively.

NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES:

         As described in Note 1, PMC Advisers, PMC Funding, PMC Capital Corp.,
         PMC Trust 1996-A and the Partnership are accounted for under the
         equity method of accounting. The condensed balance sheet and income
         statement, as applicable, for each of the entities on an individual
         basis are provided for below (rounded to the nearest thousand).

         PMC ADVISERS

         The following is the condensed balance sheet for PMC Advisers as of
         December 31, 1996 and 1995 and the condensed statements of income for
         the years ended December 31, 1996, 1995 and 1994:

                            CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>

                                                   DECEMBER 31,
                                               -------------------
                                                 1996       1995
                                               --------   --------
        ASSETS
<S>                                            <C>        <C>     
Cash and cash equivalents ..................   $ 63,000   $140,000
Due from affiliate .........................    649,000    841,000
Other assets ...............................      7,000      2,000
                                               --------   --------
                                               $719,000   $983,000
                                               ========   ========

        LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
     Due to parent .........................   $395,000   $365,000
     Deferred fee revenue ..................    286,000    592,000
     Other liabilities .....................     12,000       --
                                               --------   --------
                                                693,000    957,000
                                               --------   --------
SHAREHOLDER'S EQUITY:
     Common stock ..........................      1,000      1,000
     Additional paid-in capital ............     25,000     25,000
                                               --------   --------
                                                 26,000     26,000
                                               --------   --------
                                               $719,000   $983,000
                                               ========   ========
</TABLE>





                                      F-25
<PAGE>   49



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

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

                         CONDENSED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>

                                          1996         1995         1994
                                       ----------   ----------   ----------
INCOME:
<S>                                    <C>          <C>          <C>       
     Management fee ................   $1,562,000   $1,190,000   $  429,000
     Other income ..................       14,000       55,000      194,000
                                       ----------   ----------   ----------
        Total income ...............    1,576,000    1,245,000      623,000
                                       ----------   ----------   ----------
EXPENSES:
     General and administrative ....    1,572,000    1,242,000      620,000
     Other .........................        4,000        3,000        3,000
                                       ----------   ----------   ----------
        Total expenses .............    1,576,000    1,245,000      623,000
                                       ----------   ----------   ----------

        NET INCOME.................    $     --     $     --     $     --
                                       ==========   ==========   ==========
</TABLE>


         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, 1996, 1995 and
         1994, were $1,571,000, $1,190,000 and $620,000, respectively. These
         amounts are included in Other income, net on the accompanying
         Statements of Operations. In no event will the allocated expenses
         exceed the income available from the operations of PMC Advisers.

         PMC FUNDING CORP.

         The following is the condensed balance sheet for PMC Funding Corp. as
         of December 31, 1996 and 1995 and the condensed statements of income
         for the years ended December 31, 1996 and 1995:


                            CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                       ------------------------
                                                          1996          1995
                                                       ----------    ----------
<S>                                                    <C>           <C>       
        ASSETS
Cash and cash equivalents ..........................   $   81,000    $  277,000
Property and equipment .............................      628,000       646,000
Other assets .......................................       26,000         7,000
                                                       ----------    ----------
                                                       $  735,000    $  930,000
                                                       ==========    ==========
        LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
     Due to Parent .................................   $  642,000    $  766,000
     Other liabilities .............................         --         162,000
                                                       ----------    ----------
                                                          642,000       928,000
                                                       ----------    ----------
SHAREHOLDER'S EQUITY:
     Common stock and additional paid-in capital ...      451,000       401,000
     Accumulated deficit ...........................     (358,000)     (399,000)
                                                       ----------    ----------
                                                           93,000         2,000
                                                       ----------    ----------
                                                       $  735,000    $  930,000
                                                       ==========    ==========
</TABLE>




                                      F-26
<PAGE>   50
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

                         CONDENSED STATEMENT OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                           1996         1995
                                                        ----------   ----------
<S>                                                     <C>          <C>       
INCOME:
        Investment income ...........................   $    3,000   $    3,000
        Other income, net ...........................      173,000       46,000
                                                        ----------   ----------
                                                           176,000       49,000
                                                        ----------   ----------
EXPENSES:
        General and administrative expense ..........      135,000      126,000
                                                        ----------   ----------

             NET INCOME (LOSS) ......................   $   41,000   $  (77,000)
                                                        ==========   ==========
</TABLE>

         PMC CAPITAL LIMITED PARTNERSHIP

         On November 13, 1996, the Partnership (a newly formed special purpose
         affiliate of the Company) completed a private placement of
         approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
         Series 1996-A (the "Notes"). The Notes, issued at par, which have a
         stated maturity in 2005 and bear interest at the rate of 6.725% per
         annum, are collateralized by approximately $45.7 million of loans
         contributed by PMC Capital to the Partnership. In connection with this
         private placement, the Notes were given a rating of "Aa2" by Moody's
         Investors Service. The Partnership has the exclusive obligation for
         the repayment of the Notes, and the holders of the Notes have no
         recourse to PMC Capital or its other subsidiaries or their assets in
         the event of nonpayment of the loans. The net proceeds from the
         issuance of the Notes (approximately $37.5 million before giving
         effect to payment of offering costs of approximately $396,000 and
         after giving effect to the funding of a $2.04 million reserve fund
         held by the trustee as collateral) were distributed to PMC Capital.
         The net effect of the contributed loans less the distributed funds
         comprises the limited partners capital on the following condensed
         statement of assets, liabilities and partners' capital.

         The following is the condensed statement of assets, liabilities and
         partners' capital for PMC Capital Limited Partnership as of December
         31, 1996 and for the period November 8, 1996 (inception) to December
         31, 1996:

                                CONDENSED STATEMENT OF
                       ASSETS, LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                        1996
                                                                    ------------
<S>                                                                  <C>        
     ASSETS
Loans receivable, net ............................................   $41,805,000
Restricted Investments - money market funds and cash .............     5,444,000
Due from affiliates ..............................................       826,000
Deferred borrowing costs and other assets ........................       640,000
                                                                     -----------

                                                                     $48,715,000
                                                                     ===========
     LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
     Notes payable ...............................................   $40,183,000
     Accrued interest payable ....................................       233,000
     Due to affiliates ...........................................        83.000
                                                                     -----------
                                                                      40,499,000
                                                                     -----------

PARTNERS' CAPITAL:
     General Partner's interest .................................         11,000
     Limited Partner's interest .................................      8,205,000
                                                                     -----------
                                                                       8,216,000
                                                                     -----------
                                                                     $48,715,000
                                                                     ===========
</TABLE>


                                      F-27



<PAGE>   51



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


NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)


                         CONDENSED STATEMENT OF INCOME
                  FOR THE PERIOD NOVEMBER 8, 1996 (INCEPTION)
                              TO DECEMBER 31, 1996
<TABLE>

INCOME:
<S>                                             <C>     
     Investment income ......................   $710,000
                                                --------
EXPENSES:
     Interest expense .......................    362,000
     General and administrative expense .....     20,000
                                                --------
                                                 382,000
                                                --------
NET INCOME ..................................   $328,000
                                                ========
</TABLE>


PMC CAPITAL CORP. AND PMC TRUST 1996-A:

The following is the condensed combined balance sheet for PMC Capital
Corp. (the independent trustee of the general partner for PMC Capital
Limited Partnership) and PMC Trust 1996-A (the general partner for PMC
Capital Limited Partnership), as of December 31, 1996. PMC Capital
Corp. and PMC Trust 1996-A did not have any income statement activity
from inception through December 31, 1996 other than approximately
$3,000 earned pursuant to PMC Trust 1996-A's interest in the
Partnership of which $2,000 was distributed as a dividend to PMC
Capital:

                        CONDENSED COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                        1996
                                                                    ------------
<S>                                                                 <C>         
     ASSETS
Cash ............................................................   $      1,000
Investment in Partnership .......................................         11,000
Due from parent .................................................        250,000
                                                                    ------------
                                                                    $    262,000
                                                                    ============
     SHAREHOLDERS' AND BENEFICIAL OWNERS EQUITY
Common stock and beneficial owners beneficial interest ..........        261,000
Retained earnings ...............................................          1,000
                                                                    ------------
                                                                    $    262,000
                                                                    ============
</TABLE>





                                      F-28
<PAGE>   52



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

NOTE 16. COMBINED FINANCIAL STATEMENTS:

         As described in Note 1, the consolidated financial statements include
         the accounts of PMC and its wholly owned regulated investment company
         subsidiaries. The accounts of PMC Advisers, PMC Funding Corp., the
         Partnership, PMC Capital Corp. and PMC Trust 1996-A (the
         "Unconsolidated Entities") are accounted for by the equity method of
         accounting in conformity with Federal securities law. The following is
         the condensed combined balance sheet as of December 31, 1996 and the
         condensed combined income statement for the year ended December 31,
         1996 for the Company and the Unconsolidated Entities.

                       CONDENSED COMBINED BALANCE SHEET
                                (In thousands)
<TABLE>
<CAPTION>

                                                                   DECEMBER 31,
                                                                       1996
                                                                   ------------
<S>                                                                <C>         
ASSETS
Investments at value:
     Loans receivable, net .....................................   $    135,159
     Cash equivalents ..........................................         49,816
     Excess servicing asset ....................................          6,429
     Restricted investments and real property owned ............          6,976
                                                                   ------------
                                                                        198,380
Other assets ...................................................          6,222
                                                                   ------------
     Total assets ..............................................   $    204,602
                                                                   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
     SBA debentures payable ....................................   $     44,570
     Notes payable .............................................         75,183
     Other liabilities .........................................         14,946
                                                                   ------------
                                                                        134,699
                                                                   ------------
     Cumulative preferred stock of subsidiary ..................          7,000
                                                                   ------------

SHAREHOLDERS' EQUITY:
     Common Stock ..............................................            112
     Additional paid-in capital ................................         62,125
     Undistributed net operating income ........................          1,101
     Net unrealized depreciation on investments ................           (435)
                                                                   ------------
                                                                         62,903
                                                                   ------------
     Total liabilities and shareholders' equity ................   $    204,602
                                                                   ============
</TABLE>

                     CONDENSED COMBINED STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1996
                                 (In thousands)

<TABLE>
<S>                                                                <C>         
INCOME:
     Investment income .........................................   $     21,835
     Other income, net .........................................          2,504
                                                                   ------------
        Total income ...........................................         24,339
                                                                   ------------
EXPENSES:
     Salaries and related benefits .............................          3,180
     General and administrative expenses .......................            998
     Interest ..................................................          6,070
     Other .....................................................            724
                                                                   ------------
        Total expense ..........................................         10,972
                                                                   ------------
Net operating income ...........................................         13,367
Realized and unrealized gain (loss) on investments .............           (147)
                                                                   ------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
        GAIN (LOSS) ON INVESTMENTS .............................   $     13,220
                                                                   ============
</TABLE>


                                      F-29



<PAGE>   53



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

NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS:

         The estimates of fair value as required by SFAS No. 107 differ from
         the value of the financial assets and liabilities determined by the
         Board of Directors primarily as a result of the effects of discounting
         future cash flows. Considerable judgement is required to interpret
         market data and develop the estimates of fair value. Accordingly, the
         estimates presented herein are not necessarily indicative of the
         amounts of the Company could realize in a current market exchange or
         the amount that ultimately will be realized by the Company upon
         maturity or disposition.

         The estimated fair values of the Company's financial instruments
         pursuant to SFAS No. 107 are as follows:

<TABLE>
<CAPTION>
                                             1996                 1995
                                      -------------------   --------------------
                                                Estimated              Estimated
                                      Carrying     Fair     Carrying     Fair
                                       Amount     Value      Amount      Value
                                      --------  ---------   --------   ---------
                                                    (In thousands)
<S>                                   <C>         <C>       <C>         <C>
Assets:
      Loans receivable, net .......   $ 93,354   $ 97,048   $110,499   $114,353
      Cash and cash equivalents ...     50,017     50,017     31,574     31,574
      Restricted investments ......      1,229      1,229      1,785      1,785
      Excess servicing asset ......      6,429      6,429      7,514      7,514

Liabilities:
      Debentures payable ..........     44,570     42,864     43,540     42,362
      Notes payable ...............     35,000     34,310     35,000     34,881

</TABLE>

          Loans receivable, net: The estimated fair value for all fixed rate
          loans is estimated by discounting the estimated cash flows using the
          current rate at which similar loans would be made to borrowers with
          similar credit ratings and maturities. The impact of delinquent loans
          on the estimation of the fair values described above is not
          considered to have a material effect and accordingly, delinquent
          loans have been disregarded in the valuation methodologies employed.

          Cash and cash equivalents, restricted investments and excess
          servicing asset: The carrying amount is a reasonable estimation of
          fair value.

          Debentures payable and notes payable: The estimated fair value is
          based on present value calculation based on prices of the same or
          similar instruments after considering risk, current interest rates
          and remaining maturities.


NOTE 18.  WRITE-DOWN OF REGISTRATION COSTS:

          In 1994, PMC Investment Corporation ("PMIC") filed a registration
          statement with the Securities and Exchange Commission to register
          shares of its common stock. The Company had incurred approximately
          $136,000 in costs in connection with the filing of the registration
          statement. PMIC, a licensed specialized small business investment
          company, uses long-term funds provided by the SBA through the
          issuance of Debentures (which are guaranteed by the SBA and on which
          the interest rate is reduced through an SBA subsidy of 3% during the
          first five years). Due to the lack of availability of SBA subsidized
          Debentures or preferred stock for the SSBIC program, the Company
          believed the registration would not be completed in the near term.
          Accordingly, during the year ended December 31, 1995, the Company
          expensed the costs of registration.






                                      F-30
<PAGE>   54
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                          CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           CONSOLIDATED       
                                                                              BEFORE          
                                                          ELIMINATION       ELIMINATION   PMC CAPITAL,
                                          CONSOLIDATED      ENTRIES           ENTRIES          INC.     
                                          ------------   ------------      ------------   ------------
<S>                                       <C>            <C>               <C>            <C>         
              ASSETS

INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
  Loans receivable, net ................  $     93,354   $       --        $     93,354   $     24,074
  Cash equivalents .....................        49,677           --              49,677         13,178
  Investment in subsidiaries ...........         8,585        (24,428)(a)        33,013         33,013
  Excess servicing asset, net ..........         6,429           --               6,429           --   
  Restricted investments ...............         1,229           --               1,229           --   
  Real property owned ..................           303           --                 303           --   
                                          ------------   ------------      ------------   ------------

Total investments ......................       159,577        (24,428)          184,005         70,265
                                          ------------   ------------      ------------   ------------

OTHER ASSETS:
  Receivable for loans sold ............         2,508           --               2,508            222
  Due from affiliates ..................         1,097        (33,466)(b)        34,563         34,494
  Deferred charges, deposits and
    other assets .......................           885           --                 885            216
  Accrued interest receivable ..........           376           --                 376            157
  Cash .................................           340           --                 340            140
  Property and equipment, net ..........           181           --                 181             82
                                          ------------   ------------      ------------   ------------

Total other assets .....................         5,387        (33,466)           38,853         35,311
                                          ------------   ------------      ------------   ------------

TOTAL ASSETS ...........................  $    164,964   $    (57,894)     $    222,858   $    105,576
                                          ============   ============      ============   ============



  LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  SBA debentures payable ...............  $     44,570   $       --        $     44,570   $       --   
  Notes payable ........................        35,000           --              35,000         35,000
  Accounts payable .....................         4,145           --               4,145            132
  Dividends payable ....................         3,635           --               3,635          3,572
  Allowance for credit losses
    on loans sold ......................         1,533           --               1,533           --   
  Borrower advances ....................         1,795           --               1,795            184
  Accrued interest payable .............         1,442           --               1,442            433
  Due to affiliates ....................         1,076        (33,466)(b)        34,542          1,076
  Deferred fee revenue .................           419           --                 419            167
  Other liabilities ....................         1,446           --               1,446          1,074
                                          ------------   ------------      ------------   ------------

Total liabilities ......................        95,061        (33,466)          128,527         41,638
                                          ------------   ------------      ------------   ------------

Cumulative preferred stock
  of subsidiary ........................         7,000          3,000             4,000           --   
                                          ------------   ------------      ------------   ------------

SHAREHOLDERS' EQUITY:
  Cumulative preferred stock
    of subsidiary, 3% ..................          --           (3,000)(a)         3,000           --   
  Common stock .........................           112            (22)(a)           134            112
  Additional paid-in capital ...........        62,125        (22,373)(a)        84,498         62,125
  Undistributed net operating income ...         1,101         (3,033)(a)         4,134          1,701
  Net unrealized depreciation
    on investments .....................          (435)          --                (435)          --   
                                          ------------   ------------      ------------   ------------

                                                62,903        (28,428)           91,331         63,938
  Less treasury stock ..................          --            1,000            (1,000)          --   
                                          ------------   ------------      ------------   ------------

Total shareholders' equity .............        62,903        (27,428)           90,331         63,938
                                          ------------   ------------      ------------   ------------

TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY .................  $    164,964   $    (57,894)     $    222,858   $    105,576
                                          ============   ============      ============   ============

NET ASSET VALUE PER COMMON SHARE .......  $       5.64
                                          ============
<CAPTION>
                                             FIRST         WESTERN
                                          WESTERN SBLC,   FINANCIAL         PMC
                                              AND          CAPITAL       INVESTMENT
                                           SUBSIDIARY    CORPORATION    CORPORATION
                                          ------------   ------------   ------------
<S>                                       <C>            <C>            <C>         
                ASSETS

INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
  Loans receivable, net ................  $     26,305   $     14,413   $     28,562
  Cash equivalents .....................         5,172         14,668         16,659
  Investment in subsidiaries ...........          --             --             --
  Excess servicing asset, net ..........         6,429           --             --
  Restricted investments ...............         1,229           --             --
  Real property owned ..................           163            140           --
                                          ------------   ------------   ------------

Total investments ......................        39,298         29,221         45,221
                                          ------------   ------------   ------------

OTHER ASSETS:
  Receivable for loans sold ............         2,286           --             --
  Due from affiliates ..................             9             29             31
  Deferred charges, deposits and
    other assets .......................            86            167            416
  Accrued interest receivable ..........            15             68            136
  Cash .................................           158             18             24
  Property and equipment, net ..........            33             33             33
                                          ------------   ------------   ------------

Total other assets .....................         2,587            315            640
                                          ------------   ------------   ------------

TOTAL ASSETS ...........................  $     41,885   $     29,536   $     45,861
                                          ============   ============   ============



  LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  SBA debentures payable ...............  $       --     $     20,570   $     24,000
  Notes payable ........................          --             --             --
  Accounts payable .....................         4,011           --                2
  Dividends payable ....................          --             --               63
  Allowance for credit losses
    on loans sold ......................         1,533           --             --
  Borrower advances ....................         1,048            231            332
  Accrued interest payable .............            51            563            395
  Due to affiliates ....................        32,340             93          1,033
  Deferred fee revenue .................            32             90            130
  Other liabilities ....................           298             26             48
                                          ------------   ------------   ------------

Total liabilities ......................        39,313         21,573         26,003
                                          ------------   ------------   ------------

Cumulative preferred stock
  of subsidiary ........................          --             --            4,000
                                          ------------   ------------   ------------

SHAREHOLDERS' EQUITY:
  Cumulative preferred stock
    of subsidiary, 3% ..................          --             --            3,000
  Common stock .........................          --               21              1
  Additional paid-in capital ...........         2,000          7,934         12,439
  Undistributed net operating income ...         1,796            110            527
  Net unrealized depreciation
    on investments .....................          (224)          (102)          (109)
                                          ------------   ------------   ------------

                                                 3,572          7,963         15,858
  Less treasury stock ..................        (1,000)          --             --
                                          ------------   ------------   ------------

Total shareholders' equity .............         2,572          7,963         15,858
                                          ------------   ------------   ------------

TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY .................  $     41,885   $     29,536   $     45,861
                                          ============   ============   ============

NET ASSET VALUE PER COMMON SHARE .......
</TABLE>


(a) To eliminate PMC Capital, Inc.'s investment in its wholly owned investment
    company subsidiaries.
(b) To eliminate intercompany advances.

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATING FINANCIAL STATEMENTS





                                      F-31
<PAGE>   55
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                       CONSOLIDATING STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                           CONSOLIDATED       
                                                                              BEFORE          
                                                          ELIMINATION       ELIMINATION   PMC CAPITAL,
                                          CONSOLIDATED      ENTRIES           ENTRIES          INC.     
                                          ------------   ------------      ------------   ------------
<S>                                       <C>            <C>               <C>            <C>         
Investment income:
  Interest .............................  $     18,571   $       --        $     18,571   $      3,950
  Premium income .......................         1,942           --               1,942          1,937
  Other investment income, net .........           608           --                 608            260
                                          ------------   ------------      ------------   ------------

Total investment income ................        21,121           --              21,121          6,147

Other income, net ......................         2,331           --               2,331          1,805
Equity in income (loss) of
  subsidiaries .........................           369        (12,038)(a)        12,407         12,407
                                          ------------   ------------      ------------   ------------

Total income ...........................        23,821        (12,038)           35,859         20,359
                                          ------------   ------------      ------------   ------------

Expense:
  Interest .............................         5,708           --               5,708          2,624
  Salaries and related benefits ........         3,180           --               3,180          3,180
  General and administrative ...........           843           --                 843            721
  Profit sharing plan ..................           217           --                 217            217
  Rent .................................           213           --                 213            213
  Legal and Accounting .................           149           --                 149            139
  Small Business Administration
    fees ...............................            99           --                  99           --   
  Directors and shareholders
    expense ............................            45           --                  45             45
                                          ------------   ------------      ------------   ------------

Total expense ..........................        10,454           --              10,454          7,139
                                          ------------   ------------      ------------   ------------


Net  operating income ..................        13,367        (12,038)           25,405         13,220
                                          ------------   ------------      ------------   ------------

Realized and unrealized gain
  (loss) on investments:
    Loans written-off ..................          (214)          --                (214)          --   
    Recoveries on loans written-off ....            35           --                  35           --   
    Change in unrealized
      appreciation (depreciation)
      on investments ...................            32           --                  32           --   
                                          ------------   ------------      ------------   ------------

                                                  (147)          --                (147)          --   
                                          ------------   ------------      ------------   ------------

Net operating income and realized
  and unrealized gain (loss) on
  investments ..........................  $     13,220   $    (12,038)     $     25,258   $     13,220
                                          ============   ============      ============   ============

Earnings per common share ..............  $       1.18
                                          ============
<CAPTION>
                                             FIRST         WESTERN
                                          WESTERN SBLC,   FINANCIAL         PMC
                                              AND          CAPITAL       INVESTMENT
                                           SUBSIDIARY    CORPORATION    CORPORATION
                                          ------------   ------------   ------------
<S>                                       <C>            <C>            <C>         
Investment income:
  Interest .............................  $      6,024   $      3,233   $      5,364
  Premium income .......................             5           --             --
  Other investment income, net .........            40            164            144
                                          ------------   ------------   ------------

Total investment income ................         6,069          3,397          5,508

Other income, net ......................           334             50            142
Equity in income (loss) of
  subsidiaries .........................          --             --             --
                                          ------------   ------------   ------------

Total income ...........................         6,403          3,447          5,650
                                          ------------   ------------   ------------

Expense:
  Interest .............................            16          1,781          1,287
  Salaries and related benefits ........          --             --             --
  General and administrative ...........            35             31             56
  Profit sharing plan ..................          --             --             --
  Rent .................................          --             --             --
  Legal and Accounting .................             3              1              6
  Small Business Administration
    fees ...............................          --               31             68
  Directors and shareholders
    expense ............................          --             --             --
                                          ------------   ------------   ------------

Total expense ..........................            54          1,844          1,417
                                          ------------   ------------   ------------


Net  operating income ..................         6,349          1,603          4,233
                                          ------------   ------------   ------------

Realized and unrealized gain
  (loss) on investments:
    Loans written-off ..................           (70)          (144)          --
    Recoveries on loans written-off ....            20           --               15
    Change in unrealized
      appreciation (depreciation)
      on investments ...................            (6)            80            (42)
                                          ------------   ------------   ------------

                                                   (56)           (64)           (27)
                                          ------------   ------------   ------------

Net operating income and realized
  and unrealized gain (loss) on
  investments ..........................  $      6,293   $      1,539   $      4,206
                                          ============   ============   ============

Earnings per common share ..............
</TABLE>



(a)  To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
     investment company subsidiaries.

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATING FINANCIAL STATEMENTS




                                      F-32
<PAGE>   56
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
                               DECEMBER 31, 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  NET
                                                                                               UNREALIZED
                                                                    ADDITIONAL UNDISTRIBUTED  APPRECIATION                TOTAL
                                                PREFERRED  COMMON    PAID-IN   NET OPERATING (DEPRECIATION)  TREASURY  SHAREHOLDERS'
                                                STOCK, 3%  STOCK     CAPITAL      INCOME     ON INVESTMENTS    STOCK      EQUITY
                                                --------- --------  ---------- ------------- -------------- ---------- ------------
<S>                                              <C>      <C>       <C>         <C>           <C>           <C>        <C>         
PMC CAPITAL, INC

  BALANCES, JANUARY 1, 1996 .................... $   --   $    109  $   58,429  $      1,334  $       --    $     --   $     59,872

  Net income ...................................     --       --          --          13,220          --          --         13,220
  Dividend reinvestment plan, 180,767 shares ...     --          3       3,696          --            --          --          3,699
  Dividends on common stock ....................     --       --          --         (12,853)         --          --        (12,853)
                                                 -------- --------  ----------  ------------  ------------  ---------- ------------

  BALANCES, DECEMBER 31, 1996 .................. $   --   $    112  $   62,125  $      1,701  $       --    $     --   $     63,938
                                                  ======== ========  ==========  ============  ============  ========== ============

FIRST WESTERN SBLC, INC. AND SUBSIDIARY

  BALANCES, JANUARY 1, 1996 .................... $   --   $   --    $    2,000  $      1,497  $       (218) $ (1,000) $       2,279

  Net income ...................................     --       --          --           6,299            (6)       --          6,293
  Dividends to parent company ..................     --       --          --          (6,000)         --          --         (6,000)
                                                 -------- --------  ----------  ------------  ------------  ---------- ------------

  BALANCES, DECEMBER 31, 1996 .................. $   --   $   --    $    2,000  $      1,796  $       (224) $ (1,000) $       2,572
                                                 ======== ========  ==========  ============  ============  ========== ============

WESTERN FINANCIAL CAPITAL CORPORATION

  BALANCES, JANUARY 1, 1996 .................... $   --   $     21  $    7,434  $        401  $       (182) $     --   $      7,674

  Net income ...................................     --       --          --           1,459            80        --          1,539
  Contribution of capital ......................     --       --           500          --            --          --            500
  Dividends to parent company ..................     --       --          --          (1,750)         --          --         (1,750)
                                                 -------- --------  ----------  ------------  ------------  ---------- ------------

  BALANCES, DECEMBER 31, 1996 .................. $   --   $     21  $    7,934  $        110  $       (102) $     --   $      7,963
                                                 ======== ========  ==========  ============  ============  ========== ============

PMC INVESTMENT CORPORATION

  BALANCES, JANUARY 1, 1996 .................... $  3,000 $      1  $   12,439  $        480  $        (67) $     --   $     15,853

  Net income ...................................     --       --          --           4,248           (42)       --          4,206
  Dividends to parent company ..................     --       --          --          (3,950)         --          --         (3,950)
  Dividends, preferred .........................     --       --          --            (251)         --          --           (251)
                                                  -------- --------  ----------  ------------  ------------  ---------- ------------

  BALANCES, DECEMBER 31, 1996 .................. $  3,000 $      1  $   12,439  $        527  $       (109) $     --   $     15,858
                                                 ======== ========  ==========  ============  ============  ========== ============

ELIMINATION ADJUSTMENTS
  Equity in income of subsidiaries .............     --       --          --         (12,038)         --          --        (12,038)
  Dividends to parent ..........................     --       --          --          11,700          --          --         11,700
  Stock of subsidiaries ........................   (3,000)     (22)    (22,373)         --            --         1,000      (24,395)
  Undistributed earnings of subsidiaries .......     --       --          --          (2,695)         --          --         (2,695)
                                                 -------- --------  ----------  ------------  ------------  ---------- ------------

                                                   (3,000)     (22)    (22,373)       (3,033)         --         1,000      (27,428)
                                                 -------- --------  ----------  ------------  ------------  ---------- ------------


CONSOLIDATED ................................... $   --   $    112  $   62,125  $      1,101  $       (435) $     --   $     62,903
                                                 ======== ========  ==========  ============  ============  ========== ============
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                   THESE CONSOLIDATING FINANCIAL STATEMENTS.




                                      F-33
<PAGE>   57
                       PMC CAPITAL, INC. AND SUBSIDIARIES
                     CONSOLIDATING STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      CONSOLIDATED       
                                                                                         BEFORE          
                                                                    ELIMINATION        ELIMINATION    PMC CAPITAL,
                                                   CONSOLIDATED       ENTRIES            ENTRIES           INC.     
                                                   ------------    ------------       ------------    ------------
<S>                                                <C>             <C>               <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net operating income and realized and
    unrealized gain (loss) on investments ......   $     13,220    $    (12,038)(a)   $     25,258    $     13,220
  Adjustments to reconcile net operating
    income and realized and unrealized
    gain (loss) on investments to net cash
    provided by (used in) operating activities:
     Loans funded, held for sale ...............        (21,915)           --              (21,915)           --   
     Proceeds from sale of guaranteed loans ....         19,988            --               19,988            --   
     Change in unrealized depreciation on
         investments and loans written-off .....            182            --                  182            --   
     Unrealized premium income, net ............             (5)           --                   (5)           --   
     Amortization and depreciation .............          1,084            --                1,084              84
     Accretion of loan discount and
       deferred fees ...........................           (957)           --                 (957)           (167)
     Deferred fees collected ...................            785            --                  785              52
     Equity in income of unconsolidated
       subsidiaries ............................           (369)           --                 (369)           (369)
     Net change in operating assets
       and liabilities:
         Accrued interest receivable ...........            347            --                  347              29
         Other assets ..........................            357            --                  357             148
         Accrued interest payable ..............              8            --                    8              (9)
         Borrower advances .....................           (465)           --                 (465)           (185)
         Other liabilities .....................          1,812            --                1,812             260
                                                   ------------    ------------       ------------    ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......         14,072         (12,038)            26,110          13,063
                                                   ------------    ------------       ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Loans funded .................................        (48,239)          3,239(b)         (51,478)        (14,184)
  Principal collected and other adjustments ....         22,647          (3,239)(b)         25,886           7,384
  Loans transferred to (from) affiliate ........           --              --                 --           (34,379)
  Purchase of furniture and fixtures and
     other assets ..............................           (127)           --                 (127)            (31)
  Release of (investment in) restricted cash ...            556            --                  556            --   
  Investment in subsidiaries ...................           (893)         12,538(a)         (13,431)        (13,431)
                                                   ------------    ------------       ------------    ------------
NET CASH PROVIDED BY (USED IN)
  INVESTING ACTIVITIES .........................        (26,056)         12,538            (38,594)        (54,641)
                                                   ------------    ------------       ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance or assumption
     of SBA debentures .........................            941            --                  941            --   
   Proceeds from issuance of common stock ......          2,834            (500)(a)          3,334           2,834
   Proceeds from subsidiaries ..................         37,803         (11,700)(c)         49,503          49,503
   Payment of dividends on common stock ........        (11,935)         11,700(c)         (23,635)        (11,935)
   Payment of dividends on preferred stock .....           (250)           --                 (250)           --   
   Advances from (to) affiliates, net ..........          1,114            --                1,114          (4,752)
   Payment of issuance costs on notes
     and debentures ............................            (80)           --                  (80)            (15)
                                                   ------------    ------------       ------------    ------------
NET CASH PROVIDED BY (USED IN)
  FINANCING ACTIVITIES .........................         30,427            (500)            30,927          35,635
                                                   ------------    ------------       ------------    ------------

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS .............................         18,443            --               18,443          (5,943)

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR ............................         31,574            --               31,574          19,261
                                                   ------------    ------------       ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR .........   $     50,017    $       --         $     50,017    $     13,318
                                                   ============    ============       ============    ============

SUPPLEMENTAL DISCLOSURE:
   Interest paid ...............................   $      5,433    $       --         $      5,433    $      2,366
                                                   ============    ============       ============    ============

   Dividends reinvested ........................   $        880    $       --         $        880    $        880
                                                   ============    ============       ============    ============

   Loans receivable acquired in exchange
     for SBA debentures ........................   $        158    $       --         $        158    $       --   
                                                   ============    ============       ============    ============

   Reclassification from loans receivable
     to real property owned ....................   $        453    $       --         $        453    $       --   
                                                   ============    ============       ============    ============

   Loans contributed to unconsolidated
     subsidiary, net ...........................   $     45,145    $       --         $     45,145    $     45,145
                                                   ============    ============       ============    ============
<CAPTION>
                                                      FIRST          WESTERN
                                                   WESTERN SBLC,    FINANCIAL          PMC
                                                       AND           CAPITAL        INVESTMENT
                                                    SUBSIDIARY     CORPORATION     CORPORATION
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net operating income and realized and
    unrealized gain (loss) on investments ......   $      6,293    $      1,539    $      4,206
  Adjustments to reconcile net operating
    income and realized and unrealized
    gain (loss) on investments to net cash
    provided by (used in) operating activities:
     Loans funded, held for sale ...............        (21,915)           --              --
     Proceeds from sale of guaranteed loans ....         19,988            --              --
     Change in unrealized depreciation on
         investments and loans written-off .....             76              64              42
     Unrealized premium income, net ............             (5)           --              --
     Amortization and depreciation .............            907              34              59
     Accretion of loan discount and
       deferred fees ...........................           (350)           (166)           (274)
     Deferred fees collected ...................             35              90             608
     Equity in income of unconsolidated
       subsidiaries ............................           --              --              --
     Net change in operating assets
       and liabilities:
         Accrued interest receivable ...........            111             114              93
         Other assets ..........................            164              (3)             48
         Accrued interest payable ..............              6             (14)             25
         Borrower advances .....................           (225)             27             (82)
         Other liabilities .....................          1,597              (3)            (42)
                                                   ------------    ------------    ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......          6,682           1,682           4,683
                                                   ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Loans funded .................................         (7,305)         (7,473)        (22,516)
  Principal collected and other adjustments ....          4,660           8,117           5,725
  Loans transferred to (from) affiliate ........           --             9,996          24,383
  Purchase of furniture and fixtures and
     other assets ..............................           --               (96)           --
  Release of (investment in) restricted cash ...            556            --              --
  Investment in subsidiaries ...................           --              --              --
                                                   ------------    ------------    ------------
NET CASH PROVIDED BY (USED IN)
  INVESTING ACTIVITIES .........................         (2,089)         10,544           7,592
                                                   ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance or assumption
     of SBA debentures .........................           --               941            --
   Proceeds from issuance of common stock ......           --               500            --
   Proceeds from subsidiaries ..................           --              --              --
   Payment of dividends on common stock ........         (6,000)         (1,750)         (3,950)
   Payment of dividends on preferred stock .....           --              --              (250)
   Advances from (to) affiliates, net ..........          4,861              65             940
   Payment of issuance costs on notes
     and debentures ............................           --               (65)           --
                                                   ------------    ------------    ------------
NET CASH PROVIDED BY (USED IN) 
  FINANCING ACTIVITIES ........................         (1,139)           (309)         (3,260)
                                                   ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS .............................          3,454          11,917           9,015

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR ............................          1,876           2,769           7,668
                                                   ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR .........   $      5,330    $     14,686    $     16,683
                                                   ============    ============    ============

SUPPLEMENTAL DISCLOSURE:
   Interest paid ...............................   $         10    $      1,795    $      1,262
                                                   ============    ============    ============

   Dividends reinvested ........................   $       --      $       --      $       --
                                                   ============    ============    ============

   Loans receivable acquired in exchange
     for SBA debentures ........................   $       --      $        158    $       --
                                                   ============    ============    ============

   Reclassification from loans receivable
     to real property owned ....................   $        292    $        161    $       --
                                                   ============    ============    ============

   Loans contributed to unconsolidated
     subsidiary, net ...........................   $       --      $       --      $       --
                                                   ============    ============    ============
</TABLE>

(a)  To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
     subsidiaries and the increase in investment in its wholly owned
     subsidiaries.

(b)  To eliminate the repurchase by PMC Investment Corporation of loans
     previously participated with Western Financial Capital Corporation.

(c)  To eliminate dividends paid to PMC Capital, Inc. from its investment
     company subsidiaries.

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                   THESE CONSOLIDATING FINANCIAL STATEMENTS.




                                      F-34
<PAGE>   58

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the General Partner
PMC Capital Limited Partnership:

We have audited the accompanying statement of assets, liabilities and partners'
capital of PMC Capital Limited Partnership (the "Partnership") as of December
31, 1996, and the related statements of income, partners' capital and cash
flows for the period from November 8, 1996 (inception) to December 31, 1996.
These financial statements are the responsibility of the Partnership's General
Partner. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the General Partner, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PMC Capital Limited
Partnership as of December 31, 1996, and the results of its operations and its
cash flows for the period from November 8, 1996 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.


                                                    COOPERS & LYBRAND L.L.P.


Dallas, Texas
March 5, 1997



                                     F-35




<PAGE>   59
                       PMC CAPITAL LIMITED PARTNERSHIP
             STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                               DECEMBER 31, 1996
                                 (IN THOUSANDS)



<TABLE>
<S>                                                                     <C>     
                                   ASSETS
INVESTMENTS AT VALUE:
  Loans receivable, net .............................................   $ 41,805
  Restricted investments -  money market funds and cash .............      5,444
                                                                        --------

TOTAL INVESTMENTS ...................................................     47,249
                                                                        --------

OTHER ASSETS:
  Due from affiliates ...............................................        826
  Deferred borrowing costs ..........................................        390
  Interest receivable ...............................................        239
  Other .............................................................         11
                                                                        --------

TOTAL OTHER ASSETS ..................................................      1,466
                                                                        --------

TOTAL ASSETS ........................................................   $ 48,715
                                                                        ========

                     LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
  Notes payable .....................................................   $ 40,183
  Accrued interest payable ..........................................        233
  Due to affiliates .................................................         83
                                                                        --------

TOTAL LIABILITIES ...................................................     40,499
                                                                        --------

COMMITMENTS AND CONTINGENCIES (NOTE 3)

PARTNERS' CAPITAL:
   General Partner's interest .......................................         11
   Limited Partner's interest .......................................      8,205
                                                                        --------

                                                                           8,216
                                                                        --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL .............................   $ 48,715
                                                                        ========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.




                                      F-36
<PAGE>   60
                       PMC CAPITAL LIMITED PARTNERSHIP
                              STATEMENT OF INCOME
         PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
                                 (IN THOUSANDS)



<TABLE>
<S>                                                                     <C>     
INVESTMENT INCOME:
  Interest .........................................................    $    599
  Other investment income, net .....................................         111
                                                                        --------

Total investment income ............................................         710
                                                                        --------

EXPENSES:
  Interest .........................................................         362
  General and administrative .......................................          20
                                                                        --------

Total expenses .....................................................         382
                                                                        --------


Net income .........................................................    $    328
                                                                        ========
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.




                                      F-37
<PAGE>   61
                       PMC CAPITAL LIMITED PARTNERSHIP
                         STATEMENT OF PARTNERS' CAPITAL
         PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                Limited      General
                                               Partner's    Partner's
                                               Interest     Interest       Total
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>    
BALANCE, NOVEMBER 8, 1996 (INCEPTION) ......   $    --      $    --      $    --

Limited Partner's contribution of loans
  receivable and other assets ..............      45,681         --         45,681

General Partner's cash contribution ........        --             10           10

Net income .................................         325            3          328

Partnership distributions ..................     (37,801)          (2)     (37,803)
                                               ---------    ---------    ---------


BALANCE, DECEMBER 31, 1996 .................   $   8,205    $      11    $   8,216
                                               =========    =========    =========
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.




                                      F-38
<PAGE>   62
                       PMC CAPITAL LIMITED PARTNERSHIP
                            STATEMENT OF CASH FLOWS
         PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
                                 (IN THOUSANDS)




<TABLE>
<S>                                                                    <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income .......................................................   $    328
  Adjustments to reconcile net income to net
    cash provided by operating activities:
     Amortization ..................................................         16
     Accretion of loan discount and deferred fees ..................        (28)
     Net change in operating assets
       and liabilities:
         Interest receivable .......................................       (239)
         Other assets ..............................................        (11)
         Accrued interest payable ..................................        233
                                                                       --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................        299
                                                                       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Principal collected and other adjustments ........................      3,904
  Investment in restricted cash, net ...............................     (5,444)
                                                                       --------
NET CASH USED IN INVESTING ACTIVITIES ..............................     (1,540)
                                                                       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of notes payable .........................     40,183
   Proceeds from issuance of general
     partnership interest ..........................................         10
   Partner distributions ...........................................    (37,803)
   Advances from (to) affiliates, net ..............................       (743)
   Payment of issuance costs on notes ..............................       (406)
                                                                       --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..........................      1,241
                                                                       --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...............       --

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .....................       --
                                                                       --------

CASH AND CASH EQUIVALENTS, END OF YEAR .............................   $   --
                                                                       ========

SUPPLEMENTAL DISCLOSURE:
   Interest paid ...................................................   $   --
                                                                       ========

   Loans receivable contributed from partners ......................   $ 45,681
                                                                       ========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.




                                      F-39
<PAGE>   63
                        PMC CAPITAL LIMITED PARTNERSHIP
                         NOTES TO FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          BUSINESS:

          PMC Capital Limited Partnership ("the Partnership") was formed as a
          Delaware limited partnership in November 1996 to act as a special
          purpose affiliate of PMC Capital, Inc. ("PMC Capital"). PMC Capital
          is a diversified, closed-end management investment company that has
          elected to operate as a business development company under the
          Investment Company Act of 1940. PMC engages in the business of
          originating loans to small businesses either directly or through its
          three principal subsidiaries. The Partnership was established to
          acquire loans from PMC Capital and to issue fixed-rate debt through a
          private placement. PMC Capital is either directly or indirectly the
          sole partner of the Partnership.

          PMC Capital Corp. is a Delaware corporation formed in November 1996 to
          be the independent trustee of the general partner of the Partnership.
          PMC Trust 1996-A is a Delaware business trust formed in November 1996
          to be the general partner of the Partnership.

          USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and disclosure of contingent assets and liabilities at
          the date of the financial statements and the reported amounts of
          revenues and expenses during the reporting period. Actual results
          could differ from those estimates.

          VALUATION OF INVESTMENTS

          Loans receivable are carried at amortized cost which is the loan
          principal balance less deferred fees and discounts, 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.

          Loans, including impaired loans, 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.

          Deferred fees consist of non-refundable fees less direct loan
          origination costs. These fees are being recognized over the expected
          life of the related loan as an adjustment of yield.

          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 calculated also includes loans written-off or charged-down
          during the year and recoveries of loans written-off or charged-down
          in prior years.

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




                                      F-40
<PAGE>   64



                        PMC CAPITAL LIMITED PARTNERSHIP
                         NOTES TO FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

          INTEREST INCOME

          Interest income on loans is accrued as earned. The accrual of
          interest is generally suspended when the related loan becomes 60 days
          past due ("Non-accrual Loan"). Interest income on a Non-accrual Loan
          is recognized on the cash basis.

          DEFERRED BORROWING COSTS

          Costs incurred in connection with the issuance of notes payable are
          included in deferred borrowing costs. These costs are amortized over
          the estimated life of the related obligation.

          STATEMENT OF CASH FLOWS

          The Company considers all highly liquid investments purchased with an
          original maturity of three months or less to be cash equivalents for
          purposes of the statement of cash flows.

NOTE 2.   LOANS RECEIVABLE:

          On November 13, 1996, PMC Capital contributed approximately $45.7
          million of loans (the "Contributed Loans") to the Partnership without
          recourse to PMC Capital.

          At December 31, 1996 their was no recorded investment in loans
          identified as impaired.

          The Company's portfolio of investments consists of loans to borrowers
          located principally in the southern portion of the United States. The
          most significant concentration of loans were as noted below:
<TABLE>
<CAPTION>

                                Percentage of Loan Portfolio
               State                   December 31, 1996
               -----            ----------------------------
               <S>                          <C>       
                           
               Texas                         42%
               Florida                       10%
               Other                         48%
                                            ---
                                            100%
                                            === 
</TABLE>

         There were no loans receivable; (i) greater than 60 days past due,
         (ii) on which litigation against the borrowers had commenced, or (iii)
         which were in the process of liquidation at December 31, 1996.


NOTE 3.  CREDIT RISK:

         At December 31, 1996, loans to businesses in the lodging industry
         comprised 85% of loans receivable and 74% of total assets. There can
         be no assurance that the Partnership will experience the positive
         results which PMC Capital has historically achieved from these lending
         activities. Any economic factors that negatively impact the lodging
         industry could have a material adverse effect on the business of the
         Company. Additionally, loans to businesses located in Texas and
         Florida currently comprise approximately 42% and 10% of the Company's
         outstanding loan portfolio, respectively. A decline in economic
         conditions in any of these states may adversely affect the
         Partnership.





                                      F-41



<PAGE>   65



                        PMC CAPITAL LIMITED PARTNERSHIP
                         NOTES TO FINANCIAL STATEMENTS

NOTE 4.    NOTES PAYABLE:

           On November 13, 1996, the Partnership completed a private placement
           of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
           Series 1996-A (the "Notes"). The Notes, issued at par, which have a
           stated maturity in 2005 and bear interest at the rate of 6.725% per
           annum, are collateralized by approximately $45.7 million of loans
           contributed by PMC Capital to the Partnership. In connection with
           this private placement, the Notes were given a rating of "Aa2" by
           Moody's Investors Service. The Partnership has the exclusive
           obligation for the repayment of the Notes, and the holders of the
           Notes have no recourse to PMC Capital or its other subsidiaries or
           their assets in the event of nonpayment of the loans. Required
           principal payments to the noteholders are based upon the collection
           of principal on the Contributed Loans. All principal collected on
           the Contributed Loans during the monthly period (as defined in the
           Trust Indenture) are used to make the required principal payment on
           the first business day of the following month.

NOTE 5.    PARTNERS' CAPITAL:

           The net proceeds from the issuance of the Notes (approximately $37.5
           million before giving effect to payment of offering costs of
           approximately $396,000 and after giving effect to the funding of a
           $2.04 million reserve fund held by the trustee as collateral) were
           distributed to PMC Capital. Pursuant to an agreement between PMC
           Capital and PMC Trust 1996-A, PMC Trust 1996-A waived any rights it
           had under the partnership agreement to receive any portion of such
           distribution.

NOTE 6.    FAIR VALUES OF FINANCIAL INSTRUMENTS:

           The estimates of fair value as required by Statement of Financial
           Accounting Standards ("SFAS") No. 107 differ from the value of the
           financial assets and liabilities determined by the General Partner
           primarily as a result of the effects of discounting future cash
           flows. Considerable judgement is required to interpret market data
           and develop the estimates of fair value. Accordingly, the estimates
           presented herein are not necessarily indicative of the amounts the
           Partnership could realize in a current market exchange or the amount
           that ultimately will be realized by the Partnership upon maturity or
           disposition.

           The estimated fair values of the Partnership's  financial instruments
           pursuant to SFAS No. 107 are as follows:

<TABLE>
<CAPTION>
                                            1996
                                   ----------------------
                                               Estimated
                                   Carrying      Fair
                                    Amount       Value
                                   ----------------------
                                       (In thousands)

<S>                                <C>           <C>    
Assets:
    Loans receivable, net ......   $41,805       $44,115
    Restricted investments .....     5,444         5,444
Liabilities:
    Notes payable ..............    40,183        39,770
</TABLE>


           Loans receivable, net: The estimated fair value for all fixed rate
           loans is estimated by discounting the estimated cash flows using the
           current rate at which similar loans would be made to borrowers with
           similar credit ratings and maturities. The impact of delinquent
           loans on the estimation of the fair values described above is not
           considered to have a material effect and accordingly, delinquent
           loans have been disregarded in the valuation methodologies employed.







                                      F-42



<PAGE>   66


                        PMC CAPITAL LIMITED PARTNERSHIP
                         NOTES TO FINANCIAL STATEMENTS

NOTE 6.    FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)


           Restricted investments : The carrying amount is a reasonable
           estimation of fair value.

           Notes payable: The estimated fair value is based on present value
           calculation using prices of the same or similar instruments after
           considering risk, current interest rates and remaining maturities.

NOTE 7.    RELATED PARTY TRANSACTIONS:

           At December 31, 1996, the balance in due to affiliates of $83,000
           was a result of payments on loans receivable of affiliates deposited
           directly by the borrower into the Partnership's operating bank
           account. The balance in due from affiliates of $826,000 was a result
           of payments on the Partnership's loans receivable deposited directly
           by the borrower into an affiliate's operating bank account. These
           balances were transferred to the appropriate company subsequent to
           year end.




                                       F-43



<PAGE>   67
                                    EXHIBITS
                                    ---------

<TABLE>
<CAPTION>
    Exhibit     Description                                               Page
    -------     -----------                                               ----
    <S>         <C>                                                       <C>
    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"), Amendment
                No. 9 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.
             
    4.3         Debenture dated February 4, 1987 for $2,480,000 loan
                with SBA - incorporated by reference from Registrant's
                Form N-2, Amendment No. 6, dated April 27, 1988.
             
    4.4         Debenture dated February 17, 1988 for $1,500,000 loan
                With SBA - incorporated by reference from Exhibit E
                4(b)(5)(n) to the Registrant's Form N-2, Amendment
                No. 7 dated April 27, 1991.
             
    4.5         Debenture dated June 27, 1990 for $2,000,000 loan
                with SBA - incorporated by reference from Exhibit
                4(b)(5)(n) Registrant's Form N-2, Amendment No. 9,
                dated April 29, 1991.
             
    4.6         Debenture dated September 26, 1990 for $2,810,000
                loan with SBA - incorporated by reference from Exhibit
                4(b)(5)(o) to the Registrant's Form N-2, Amendment 9,
                dated April 29, 1991.
             
    4.7         Debenture dated September 26, 1990 for $1,500,000
                loan with SBA - incorporated by reference from Exhibit
                4(b)(5)(p) to the Registrant's Form N-2, Amendment 9,
                dated April 29, 1991.
             
    4.8         Debenture dated March 29, 1990 for $1,000,000 loan
                with SBA - incorporated by reference from Exhibit 5(q)
                from Registrant's Form N-2, Amendment No. 3, dated
                August 18, 1992.
             
    4.9         Debenture dated September 27, 1989 for $1,000,000
                loan with SBA - incorporated by reference from Exhibit
                5(r) from Registrant's Form N-2, Amendment No. 3,
                dated August 18, 1992.
</TABLE>          





                                      E-1


<PAGE>   68


<TABLE>
   <S>         <C>                                                       <C>
   4.10        Debenture dated September 27, 1989 for $1,500,000
               loan with SBA - incorporated by reference from Exhibit
               5(s) from Registrant's Form N-2, Amendment No. 3,
               dated August 18, 1992.
               
   4.11        Debenture dated January 2, 1990 for $3,000,000 loan
               with SBA - incorporated by reference from Exhibit (5)(t)
               from Registrant's Form N-2, Amendment No. 3, dated
               August 18, 1992.
               
   4.12        Debenture dated August 18, 1989 for $1,000,000 loan
               with SBA - incorporated by reference from Exhibit (5)(u)
               from Registrant's Form N-2, Amendment No. 3, dated
               August 18, 1992.
               
 **4.13        Debenture dated September 28, 1994 for $3,000,000
               loan with SBA.
               
 **4.14        Debenture dated September 28, 1994 for $3,000,000
               loan with SBA.
               
 **4.15        Senior Note dated July 19, 1993 for $6,000,000 with
               Columbine Life Insurance Company.
               
 **4.16        Senior Note dated July 19, 1993 for $9,000,000 with
               Life Insurance Company of Georgia.
               
 **4.17        Senior Note dated July 19, 1993 for $5,000,000 with
               SouthLand Life Insurance Company.
               
 **4.18        Senior Note dated December 15, 1993 for $2,000,000
               with Peerless Insurance Company.
               
 **4.19        Senior Note dated December 15, 1993 for $3,000,000
               with Security Life of Denver Insurance Company.
               
***4.20        Debenture dated March 29, 1995 for $3,000,000
               loan with SBA.
               
***4.21        Debenture dated June 28, 1995 for $5,000,000
               loan with SBA.
               
***4.22        Debenture dated September 27, 1995 for $7,000,000
               loan with SBA.
               
***4.23        Debenture dated September 29, 1987 for $800,000 loan
               with SBA assumed from J & D Capital Corporation.
               
***4.24        Debenture dated December 20, 1989 for $650,000 loan
               with SBA assumed from J & D Capital Corporation.
               
***4.25        Debenture dated June 27,1990 for $300,000 loan with
               SBA assumed from J & D Capital Corporation.
               
***4.26        Debenture dated December 6, 1992 for $510,000 loan
               with SBA assumed from J & D Capital Corporation.
</TABLE>


                                     E-2


<PAGE>   69

<TABLE>
   <S>         <C>                                                       <C>
***4.27        Senior Note dated April 19, 1995 for $5,000,000 with
               Security Life of Denver Insurance Company.
               
***4.28        Senior Note dated April 19, 1995 for $2,000,000
               with Peerless Insurance Company.
               
***4.29        Senior Note dated April 19, 1995 for $2,000,000
               with Indiana Insurance Company.
               
***4.30        Senior Note dated April 19, 1995 for $1,000,000 with
               Security Life of Denver Insurance Company.
               
  *4.31        Debenture dated June 27, 1990 for $1,030,000
               assumed from ESLO Capital Corporation.
               
  *10.1        Employment contract between the Registrant and
               Lance B. Rosemore dated June  30, 1996.
               
  *10.2        Employment contract between the Registrant and
               Andrew S. Rosemore dated June 30, 1996.
               
  *10.3        Employment contract between the Registrant and
               Fredric M. Rosemore dated June 30, 1996.
               
  *10.4        Employment contract between the Registrant and
               Jan F. Salit dated June 30, 1996.
               
  *10.5        Employment contract between the Registrant and
               Barry N. Berlin dated June 30, 1996.
               
 **10.6        Employment contract between the Registrant and
               Mary J. Brownmiller dated August 1, 1994.
               
  *10.7        Master Promissory Note for $15,000,000
               with Bank One, Texas N.A.
               
  *10.8        Servicing Agreement by and among Sun Trust
               Bank, PMC Capital Limited Partnership and
               PMC Capital, Inc.
               
    *21        Subsidiaries of Registrant
               
    *27        Financial Data Schedule
</TABLE>
-----------------------

*        Filed herewith
**       Previously filed with the Commission as an exhibit to the
         Registrant's Form 10-K for the fiscal year ended December 31,
         1994
***      Previously filed with the Commission as an exhibit to the
         Registrant's Form 10-K for the fiscal year ended December 31,
         1995
                     





                                     E-3