PMC TAKES A LICKIN’, KEEPS ON TICKIN’, AIMS BACK INTO BLACK: ONE-TWO PUNCH PUT FIRM ON CANVAS, BUT IT’S ON ITS FEET AGAIN, SEEKING NEW CAPITAL

The president and chief executive of PMC International Inc. is the George Foreman of financial services. No matter how hard he gets hit — and with four years of earnings losses he has endured a pummeling — Kenneth Phillips remains standing.

The feisty founder of the embattled Denver-based provider of wrap accounts and asset allocation services isn’t throwing in the towel. But he is seeking help.

The firm recently hired Putnam Lovell Thornton & de Guardiola of San Francisco to find a strategic partner to infuse the cash-starved firm with capital. A deal is believed to be imminent, and Mr. Phillips, 46, says PMC is nearly out of the woods. “I think we’ll have this thing profitable by yearend,” he says.

Some wonder how the firm got into the woods in the first place, given the booming stock market. Even considering the heavy costs of technology and of maintaining a support staff of nearly 100, how could any kind of financial services company suffer so much?

PMC’s earnings troubles have been particularly embarrassing, because it is the only publicly traded company of its kind.

The stock’s total return has plummeted 44% over the last 12 months. It was trading at $3.625 late last week.

“If you couldn’t thrive in this environment for the last three years something is wrong,” says Susan Barrett, a principal at the West Conshohocken, Pa., money management firm Dearden

PMC takes a lickin’ but keeps on tickin’

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Maguire & Weaver Inc. She had invested some of her personal money in the firm.

Mr. Phillips, who founded the firm in 1986, points to a com

bination of two things:

l A distracting lawsuit that he says is now behind the firm.

l Corporate investments that have resulted in short-term hits to earnings including “several million dollars” in technology investments over the past three years.

“You get to a point in business where you say, ‘Are you going to compromise earnings for growth?’ and we made a decision that we would,” Mr. Phillips says.

ACCUSED OF HIDING PROFITS

He says the company’s balance sheet was destroyed by a lengthy and costly battle with the Securities and Exchange Commission over wrap account trading methods.

In settling the suit two years ago, the firm neither admitted nor denied wrongdoing but paid a $25,000 fine and returned $600,000 to investors. The suit, focusing on accusations that PMC didn’t fully disclose hidden profits made in executing orders for wrap-account clients, cost $2 million in legal fees. The firm also had to undergo a costly reorganization of its transaction process, and the publicity damaged the company’s reputation.

Now that those distractions are behind him, Mr. Phillips is scrambling to catch up with competitors.

Others in the highly competitive and technology-intensive business have had to seek out capital to expand. Reinhardt Werba Bowen Advisory Service of San Jose, Calif., for example, recently sold out to Canadian money manager Assante Capital Management.

These outfits serve as intermediaries between money managers and the likes of independent financial advisers, advisers at banks, securities firms, insurance companies and accountants. They help advisers to select money managers and to customize investment portfolios for clients. This entails providing client statements, executing transactions, and developing and distributing asset allocation software, marketing materials and other technology-driven services.

The companies cater to fee-based advisers who sell wrap accounts, a portfolio of investments in which the investor is charged a percentage of assets under management, or managed accounts, a wrap account of individual securities for wealthy investors.

To finance the growth it needs to compete, PMC is considering a couple of options, confirms Jeffrey Lovell, a managing director at the company’s investment bank. “Both are of the strategic partner type and would clearly enhance its competitiveness going forward.”

PMC finally appears to be picking itself up off the canvas. Though it operated in the red last year, revenues grew 48% over 1996, to $14.9 million. Mr. Phillips expects revenues to increase at about the same pace in 1998. With a cost reduction plan implemented in the first-quarter, and a restructuring of its management, things are finally looking up, he insists.

Last year, one major investment was Atlanta broker-dealer Adam Investments, which PMC acquired for $10 million. The purchase increased investor assets that it oversees, from which it derives its revenues, from $1 billion to $3 billion. But Mr. Phillips says merger-related costs, such as moving the acquired firm to Denver and paying severance for staff reductions, smacked the bottom line in 1997 and the first quarter of this year.

On the bright side, the firm has landed some heavyweight clients. In particular, Ernst & Young. The nation’s second-largest accounting firm began using PMC’s portfolio management services a year ago.

Other big names include the brokerage subsidiary of Cigna Financial Services, which has tapped PMC for asset allocation services. Last year, Everen Clearing Corp. and Republic National Bank also came on board.

But PMC is suffering growing pains. Ernst & Young is the largest single client the firm has ever had, and it has taken up a lot of resources, observes Roger Bowden, PMC’s former chief investment officer.

Mr. Bowden left last year, he says, because he got an offer to be chief investment officer at a unit of Fiserv.

“When a firm gets a client that’s larger than its previous clients it has to restructure internally all of the firm’s business units,” he says. “It’s like when you catch a huge fish. It takes a while to get it in the boat.”

An executive at Ernst & Young overseeing its relationship with PMC says he’s satisfied with the service, but he declined to give details on the relationship. Public documents acknowledge the firm had trouble rolling out the E&Y services on schedule. Mr. Phillips says: “Ernst & Young has always been fine. There’s no problem there.”

Another example of PMC’s growth problems came in the first-quarter of this year when a new portfolio accounting system melted down while under test. It cost $100,000 to fix the problem, but no customers were directly affected, Mr. Phillips says.

Moreover, PMC is having trouble selling its asset allocation software, which it inherited through Adam Investments, says one broker-dealer customer. No fault of PMC, which has clients in 11 countries, but asset allocation strategies that diversify a client’s portfolio among bonds and foreign stocks have underperformed the U.S. stock market in general.

Some customers see Mr. Phillips as a kind of Charlie Brown of the industry more than anything else.

“It’s more of a case of a black cloud of bad luck hanging over them,” says John Peters, director of asset management division at Atlanta-based broker-dealer IFG Network Services Inc.

MYSTERY MAN

Mr. Phillips is an enigmatic figure who when asked what he did pre-PMC would say only that he was in the fine arts business. “We like some mystery here.”

Despite Mr. Phillips’s style, one customer says PMC provides top-of-the-line marketing materials and sophisticated technology. “He’s a little cocky, a little overconfident, but he delivers,” says Hy Cohen, president of New York broker-dealer Royal Alliance Associates Inc.

Mr. Phillips says the firm’s revenue growth shows it’s “really booming again.” Now, it’s time for him to work on transforming the company. “The question,” he says, “is how do you capitalize on that growth? Hence, Putnam Lovell.”