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As filed with the Securities and Exchange Commission on March 20, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-21443
PLYMOUTH COMMERCIAL MORTGAGE FUND
(Exact name of registrant as specified in its charter)
DELAWARE 74-6439983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O GREYSTONE ADVISERS, INC.,
13333 BLANCO ROAD, SUITE 314,
SAN ANTONIO, TEXAS 78216-7756
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
210-493-3971
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
(NONE) (NOT APPLICABLE)
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF BENEFICIAL INTEREST, NO PAR VALUE
(Title of class)
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. [ X ] Yes [ ] 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 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. [ ]
There is currently no market for the registrant's shares of beneficial
interest. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 20, 1998, was $8,453,800, based
upon the price at which the stock was sold. The number of shares outstanding
on March 20, 1998 was 921,627.
Documents Incorporated by Reference: Part III incorporates portions of the
registrant's definitive proxy statement to be filed on or about April 8, 1998.
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PART I
ITEM 1. BUSINESS.
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THE COMPANY
ORGANIZATION
Plymouth Commercial Mortgage Fund (the "Company" or "Plymouth") is a
closed-end management investment company that was organized as a Delaware
business trust and began operating on September 27, 1996. The Company has
elected to be regulated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Company may
not change the nature of its business so as to cease to be a BDC unless
authorized by "the vote of a majority of its outstanding voting securities" as
defined in the 1940 Act.
Plymouth began operating on September 27, 1996 by acquiring all of the
interests of SWF 1995 Limited Partnership, a Texas limited partnership
("SWF-95"), through an offer made to SWF-95's investors to exchange their
equity and subordinated debt interests for cash or equity in Plymouth. After
consummating this transaction, Plymouth's net asset value was $2,246,456 and
the Company had issued and outstanding 221,627 common shares of beneficial
interest ("Shares"). SWF-95 was subsequently dissolved. Its assets are now
held directly either by the Company or by Plymouth REO, Inc., a Delaware
corporation and a wholly owned subsidiary of Plymouth. The Company
successfully closed an offering of additional Shares on December 26, 1996,
raising a gross amount, before offering costs, of $7,000,000 cash. After the
offering a total of 921,627 Shares were issued and outstanding.
BUSINESS
The Company's investment objective is to achieve a high level of
current income and capital gains by acquiring, restructuring and collecting
"impaired loans" primarily made to small businesses and secured by commercial
real estate. Except for short periods of time in which Plymouth is investing
newly acquired capital, the Company expects to maintain at least 65% of the
value of its total assets invested in impaired commercial mortgages. Plymouth
cannot change its investment objective without the approval of the board of
trustees or unless authorized by "the vote of a majority of its outstanding
voting securities" as defined in the 1940 Act.
A loan is generally considered impaired when, based on current
information and events, it is probable that a creditor will not be able to
collect all amounts due according to the contractual terms of the loan. While
different types of impaired loans are available for purchase, Plymouth
concentrates on purchasing loans secured by commercial real estate. These
loans are typically offered to buyers by financial institutions and
intermediaries in packages containing multiple loans where the cost can exceed
$1 million per package. Quite often this market for impaired loans offers
banks the only alternative to foreclosure. Plymouth purchases the loan packages
for an amount less than the contractual principal and interest balance. The
Company then attempts to recover more than it paid for the loans through
several resolution strategies including revising the payment terms, encouraging
the borrower to refinance the loan by offering to forgive indebtedness, selling
loans to third parties, or foreclosing on the loan's collateral and selling it
(this process is known as "resolving"). The Company does not typically hold
loans until maturity. Instead, it focuses on maximizing its rate of return per
loan and may hold an individual loan for only a short period of time.
Typically an entire loan package can be resolved within 18 months of purchase.
Once a loan package is purchased, Plymouth contacts the borrowers to
begin the collection process. If a borrower is able to repay or refinance the
loan, then a payoff amount is negotiated that may represent a discount to the
contractual outstanding loan balance but which is typically more than Plymouth
paid for the loan. Alternatively, if the borrower is not able to immediately
repay the reduced amount, Plymouth will attempt to restructure the loan in such
a way that the borrower can begin making monthly payments of principal and
interest. Once a loan is restructured and the borrower has established a
history of regular payments, the Company will assist the borrower to find
permanent financing or will sell the loan to a third party. In the event
repayment or restructuring of the loan is not possible, Plymouth employs all
means legally available, including action against the borrowers and foreclosing
and selling a loan's collateral, to maximize its return on investment.
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MANAGERIAL ASSISTANCE
The 1940 Act requires a BDC to generally "make available significant
managerial assistance" to the issuers of such securities as a BDC may invest
in. In this regard, the 1940 Act defines "making available significant
managerial assistance" as "any arrangement whereby a [BDC], through its
directors, officers, employees, or general partners, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
management, operations, or business objectives and policies of a portfolio
company."
Upon acquiring a newly note, Plymouth contacts the management of the
small business and offers assistance that, among other things, includes
restructuring the loan to meet the borrower's ability to pay, analyzing a
borrower's financial statements, and helping the borrower locate a third-party
lender and acquire permanent financing.
SOURCES FOR THE ACQUISITION OF LOANS
The loan packages in which the Company invests typically are offered
to buyers nationwide through either private offerings or sealed-bid auctions
typically on an "as-is, where-is" basis. Sellers include entities such as the
Federal Deposit Insurance Corporation, banks, savings and loans, insurance
companies and other institutions. If the Company purchases a loan through an
intermediary, the intermediary is typically compensated by the seller of the
loan.
Through previous business activity, the employees of the Adviser have
developed long-standing relationships with a large number of sellers of
impaired loans and intermediaries in various states who may or may not have a
contractual relationship with the Adviser. Any loan offered for sale to the
Company is evaluated by the Adviser using objectives established by the
Company's board of trustees (the "Board of Trustees").
TEMPORARY INVESTMENTS
Because Plymouth cannot control the timing or the outcome of loan
auctions, the Company may have uninvested cash from time to time. The Company
invests such cash in high-grade short-term debt securities which may be issued
or guaranteed by the U.S. government or U.S. government agencies. The Company
follows policies for investment of uninvested cash that emphasize low risk and
short-term maturities.
BORROWING
To take advantage of the difference between favorable interest rates
available from lenders and the expected rates of return from purchased loans,
the Company has established a line of credit with a commercial bank (the
"Credit Facility"). Such borrowing by the Company combined with any other
senior security representing indebtedness will not exceed the maximum amount
permitted by the 1940 Act for a BDC. See "BDC Regulation."
As of December 31, 1997, the Credit Facility had a borrowing ceiling
of $8,000,000 and the Company had borrowed $7,981,158. The company had not
borrowed any money at the end of 1996. The Credit Facility is secured by a
perfected first security interest in substantially all of the Company's assets
and expires on September 27, 1998. It is expected that the facility will be
renewed prior to its expiration in substantially the same form.
The interest rate charged by the bank is based upon average borrowings
under this facility. For borrowings of up to $2.5 million for the previous
quarter, the interest rate on the Credit Facility is prime plus 1.5%; for
average borrowings of between $2.5 million and $5.0 million for the previous
quarter, the interest rate is prime plus 1.0%; and for average borrowings of
more than $5.0 million for the previous quarter, the interest rate is prime
plus .05%. During the entire 1997 fiscal year, the bank's prime rate was
8.50%. A variable rate based on the London Interbank Offered Rate is also
available. Terms of the Credit Facility include periodic third-party auditing,
a lock box for receipt of payments, custody by a third-party custodian of
primary collateral, certain other fee payments, and loan covenants that require
the Company to meet various requirements that may be difficult to maintain at
all times.
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The Company may initially borrow up to 60% of the net cost of each new
loan that is purchased. This advance percentage, however, is reduced to a
lower percentage as the amount of time that Plymouth has held the loan
increases. The schedule below describes how the advance rate declines:
Number of Months Maximum Advance
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Plymouth has held the Loan (lessor of net cost or fair value)
-------------------------- ----------------------------------
0 to 6 60%
6 to 9 48%
9 to 12 45%
12 to 15 42%
15 to 18 32%
18 to 21 24%
21 to 24 18%
after 24 0%
Plymouth's borrowing availability is determined by multiplying the net
cost of an individual loan by the applicable percentage listed above. Net cost
is determined by subtracting from Plymouth's original cost certain payments
received by Plymouth from the borrower. Because the percentage of net cost
that the bank is willing to advance declines over time, the Company may not be
able to borrow $8,000,000 on the Credit Facility at any given time.
Additionally, should Plymouth choose to borrow the maximum available to it, the
Company would be required to make collections of a certain amount within a
short time period to comply with the Credit Facility's provisions.
All advances under the Credit Facility are subject to the lender's
discretion and continued satisfaction with the Company's business and financial
condition and operations. The Credit Facility includes several other
affirmative and negative covenants with which the Company is complying.
Subsequent to year-end the Company did not meet the interest coverage ratio.
(See discussing of interest coverage ratio under RESULTS OF OPERATIONS under
OTHER ITEMS.)
INVESTMENT ADVISER
Subject to the terms of an investment advisory agreement (the
"Agreement") and the supervision and control of its Board of Trustees, the
investments of the Company are directed by Greystone Advisers, Inc. (the
"Adviser"). The Adviser is located at 13333 Blanco Road, Suite 314, San
Antonio, Texas 78216-7756. In 1996 the Adviser was federally registered.
However, the Adviser does not manage at least $25,000,000 in assets, it was
forced to withdraw its federal registration in July 1997. The Adviser is
currently relying on an exemption from Texas registration requirements.
INVESTMENT ADVISORY AGREEMENT. Pursuant to the Agreement, the
Adviser directs the investments of the Company. Specifically, the Adviser
identifies, evaluates, resolves and monitors the investments of the Company.
The current agreement is in effect until September 22, 1998 and may be extended
after this as long as it is approved at least annually, by the Board of
Trustees, including a majority of the Trustees who are not "interested persons"
of the Company within the meaning of the 1940 Act (see "Shareholder Approval of
a New Investment Advisory Agreement" below).
Under the Agreement, the Adviser is required to pay for such basic
services as it needs to effectively satisfy its obligations. These include the
cost of office space, telephone, equipment and personnel. The Company is
required to pay those expenses which directly relate to its activities. These
include all expenses of any offering and sale by the Company of its Shares;
fees and disbursements of the Company's outside legal counsel, accountants and
custodian; fees and expenses incurred in effecting filings with federal and
state securities administrators; costs of the Company's periodic reports and
other communications to Shareholders; fees and expenses of members of the
Company's Board of Trustees who are not directors, officers or employees of the
Adviser; premiums for the fidelity bond maintained by the Company; and all
costs related to portfolio investments including, without limitation, financing
costs, legal and accounting fees and other professional or technical fees and
expenses (i.e., credit reports, title searches, delivery charges, property
taxes, insurance premiums, long-distance telephone charges, costs of
specialized consultants such as accountants or industry-specific technical
experts, and travel expenses) incurred in acquiring, monitoring, negotiating,
maintaining, working-out, and effecting the disposition of such investments, as
well as responding to any litigation arising therefrom.
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Pursuant to the Agreement, the Company pays the Adviser a monthly
management fee which is based on end-of-month asset values, payable on the 15th
day of the following month, and is calculated at the annual rate of 5.94% of
the Company's "invested assets," including those assets purchased with borrowed
capital, and 0.48% of its cash and short-term investments. The value of the
Company's "invested assets" is established by the Board of Trustees in good
faith and using their best judgment. For purposes of calculating the fee at
the end of a month that is not also the end of a calendar quarter, the value of
"invested assets" that the Board of Trustees previously established is reduced
by the amount of collections applied to the carrying value of the loan
portfolio since the end of the previous quarter, plus the cost of loans
purchased and capitalized items since the end of the previous quarter. Events
that would negatively affect the previous value of an impaired loan are also
taken into consideration in calculating the management fee.
The percentage of assets being charged by the Adviser as a management
fee is substantially higher than that paid by most investment companies because
of the additional efforts and resources associated with identifying,
evaluating, purchasing, renegotiating and collecting impaired loans.
OPERATIONS. The Adviser's personnel have had significant experience
purchasing and resolving impaired loans. Most of this experience was derived
through work for SouthWest Federated, Inc., a Texas corporation ("SWFI"). Most
of the Adviser's employees previously worked for SWFI and two individuals,
Robert R. Swendson, the Adviser's President, and Larry D. Krause, the Adviser's
Senior Vice President and Controller, helped initially found SWFI.
From 1989 to 1996, SWFI invested approximately $20 million to purchase
more than $180 million in impaired commercial mortgages and consumer loans
(outstanding principal balance at the time of purchase). SWFI made these
investments as the general partner for several limited partnerships and for its
own account. Robert Swendson, the President of the Adviser and SWFI,
attributes SWFI's success to thorough due diligence prior to making a bid,
experienced and patient negotiations with borrowers, and a focus on generating
high investor returns. The Adviser currently assists SWFI to resolve those
loans that remain under its management.
OWNERSHIP. All of the shares of the Adviser's outstanding stock are
owned by Robert R. Swendson, who also serves as a trustee and as President of
Plymouth. The Adviser has not issued any options, warrants or convertible
equity securities of any nature.
SHAREHOLDER APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT. At a
regular meeting, the Board of Trustees approved the submission of a new
investment advisory agreement to the shareholders for their vote. The new
agreement extends the advisory contract until September 22, 1999 and is
substantially similar to the terms of the current agreement.
VALUATION PROCEDURES
There is no publicly quoted market for the Company's impaired loan
portfolio. As such, the fair value of the portfolio is established by the
Board of Trustees in good faith and using their best judgment. Such values are
based upon what the Board believes the Company could reasonably expect to
receive for each impaired loan in an orderly disposition over a reasonable time
period. For the first six months after acquisition the value of an impaired
loan is typically its assigned cost unless some event occurs with respect to
the borrower that warrants an upward or downward change in its value as an
asset of the Company.
In establishing the fair value of a loan, the Board considers factors
about the individual loan as well as the general economy. Such factors include
but are not limited to: the type of loan, whether the borrower is currently
meeting the contractual terms of the obligation, the length of time that the
borrower has or has not been meeting the contractual terms, the probability
that the borrower will begin or stop making payments, the value of the
collateral and the guarantees securing the loans, the Company's historical
experience selling the type of loan being valued, various standard financial
measurements, the remaining contract terms, and prevailing interest rates.
Certain elements of the valuation procedure involve subjective judgment.
Moreover, because the majority of the Company's impaired loans are delinquent,
no assurance can be given that the Company will be able to recover the fair
value that the Board has established. The Company's impaired loans are not
typically backed by any government guarantee or private credit enhancement. In
many cases, the Company will also incur certain costs and delays in
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attempting to assert its right to payment or in foreclosing on the loan's
collateral. The actual value realized on any particular loan will vary from
the values determined by the Board and can only be determined in negotiations
between the Company and third parties.
BDC REGULATION
Being regulated as a BDC imposes certain limitations upon the
operations of the Company. In general, a BDC must be operated for the purpose
of making investments in certain types of securities ("Qualifying Assets"). A
BDC may not acquire any investment asset other than Qualifying Assets unless,
at the time the acquisition is made, Qualifying Assets represent at least 70%
of the value of the BDC's total investment assets (the "70% Test"). For
purposes of meeting the 70% Test, Qualifying Assets generally include cash,
cash items, U.S. Government securities, high quality debt securities maturing
in one year or less from the time of investment, and securities issued by an
"eligible portfolio company."
An "eligible portfolio company" is defined in the 1940 Act as any
issuer that: (a) is organized under the laws of, and has its principal place of
business in, any state or states or any possession or possessions of the United
States; (b) is neither an investment company (other than a "small business
investment company" which is licensed by the U.S. Small Business Administration
and wholly owned by the BDC) nor a company excluded from the definition of
"investment company" in the 1940 Act; and (c) does not have any class of
securities with respect to which a member of a national securities exchange,
broker, or dealer may extend or maintain margin credit to or for a customer
(e.g., publicly traded securities).
In order to treat the securities as Qualifying Assets for the purpose
of the 70% Test, a BDC must ordinarily "make available managerial assistance"
with respect to the issuer of those securities. This means, among other
things, any arrangement whereby the BDC, through its directors (e.g.,
Trustees), officers or employees, offers to provide and, if accepted, does so
provide significant guidance and counsel concerning the management, operations,
or business objectives and policies of a portfolio company (See managerial
assistance). The Company has received a response from the Office of the Chief
Counsel, Division of Investment Management, of the Securities and Exchange
Commission that allows Plymouth to treat as Qualifying Assets those assets
which the Company acquires from third parties and works with the borrower to
restructure or refinance.
APPLICATION FOR A NO-ACTION LETTER. Plymouth has found it difficult
to maintain the 70% Test described above because the definition of "eligible
portfolio company" appears to exclude loans with makers that are natural
persons. Such loans exceed 30% of the secondary market for commercial loans
and loans in this market are typically sold in packages that are not segregated
by type of maker. There are no assurances that the Company will receive a
favorable response to its No-Action Letter in 1998 or the future.
In 1997, Plymouth had to purchase three packages jointly with other
buyers who purchased the loans made by natural persons. This is not a
long-term solution for Plymouth. Plymouth has applied to the SEC for a
"no-action" letter that, if issued, would permit Plymouth to treat certain
loans made by natural persons as qualifying assets. This method of qualifying
eligible and ineligible loans would make the standard conform to certain
standards used by banks in making commercial loans.
FEDERAL TAX RULES
Subchapter M of the Internal Revenue Code also regulates the
activities of a BDC. In order to qualify, the Company must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, gains from the sale of stock or securities, or other
income derived with respect to its business of investing in such stock or
securities; (b) derive in each taxable year less than 30% of its gross income
from the sale of stock or securities held for less than three months (this
requirement was removed effective for tax years after August 5, 1997); and (c)
diversify its holdings so that at the end of each quarter of the taxable year
(i) at least 50% of the value of the Company's assets consists of cash, cash
items, U.S. government securities and other securities if such other securities
of any one issuer do not represent more than 5% of the Company's assets or 10%
of the outstanding voting securities of the issuer, and (ii) no more than 25%
of the value of the Company's assets is invested in the securities of one
issuer (other than U.S. government securities and securities of other regulated
investment companies) or of two or more issuers that are controlled (as
determined under applicable Code rules) by the Company and are engaged in the
same or similar trades or businesses.
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In addition to asset and income qualifications, a BDC is restricted as
to the amount of leverage that it can incur. Generally, a BDC may not issue
any class of senior security representing an indebtedness unless, immediately
after such issuance or sale, it will have an asset coverage of at least 200%.
"Asset coverage" of a class of senior security representing an indebtedness of
an issuer means the ratio which the value of the total assets of such issuer,
less all liabilities and indebtedness not represented by senior securities,
bears to the aggregate amount of senior securities representing indebtedness of
such issuer. At the end of 1997 the asset coverage ratio was 212%.
Having elected to be regulated as a BDC, the Company 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 its outstanding voting
securities" the 1940 Act.
EMPLOYEES AND OFFICERS
The Company has no employees. All the officers are employed by, and
receive their compensation from, the Adviser. Each of the following persons
has been duly elected to and now holds the office or offices of the Company set
forth opposite his or her name.
<TABLE>
<CAPTION>
Name Position with Age Principal Occupations During Past Five Years
---- ------------- --- --------------------------------------------
Company
-------
<S> <C> <C> <C>
Kenneth L. Bennight, Jr. Secretary 50 Mr. Bennight provided legal assistance part-time for
(appointed SWFI from 1994 through 1996. He began full time
September employment in December 1996. From 1991 to 1996, Mr.
30,1997) Bennight practiced law as a sole practitioner in San
Antonio, Texas.
Ted J. Hanes Vice President 58 Mr. Hanes was previously employed as a portfolio
(appointed manager by SWFI which he joined in October 1996.
September Prior to this, he was the senior portfolio manager
30,1997) for Federal Services Corporation, a company that
purchased and resolved impaired loans (1991-1996).
Larry D. Krause Senior Vice 49 From its founding in 1989 until 1996, Mr. Krause
President served as the controller for SWFI and as one of its
(appointed Vice Presidents.
September
3,1996)
John C. Mosher Vice President 30 Mr. Mosher was previously employed as the Chief
and Chief Financial Officer of SWFI which he joined in
Financial February 1996. Prior to joining SWFI, Mr. Mosher
Officer was an associate at Duncan-Smith Co., an investment
(appointed banking firm, from June 1993, and in retail sales
September 3,1997 prior to that date.
and resigned
March 20, 1998)
Patrick J. Panzarella Vice President 30 Mr. Panzarella was previously a certified public
of Accounting accountant working as a tax supervisor with the public
and Finance accounting firm Sol Schwartz & Associates which he joined
(appointed in 1994. Prior to joining Sol Schwartz & Associates,
January 26, 1998) Mr. Panzarella was a tax senior at the public accounting
firm Boldt & Boldt.
Robert R. Swendson Trustee, 55 From 1989 to 1995, Mr. Swendson was employed by SWFI
President and as its President and Chief Executive Officer. Mr.
Chief Executive Swendson is the Adviser's sole shareholder, its
Officer President and its Chief Executive Officer.
(appointed
September
3,1996)
</TABLE>
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Mr. Mosher has announced his resignation from both Plymouth and the
Adviser effective March 20, 1998. The Company does not expect that his
departure will have a material effect on operations. The Adviser has
reallocated his responsibilities among other employees and does not plan to
replace him at this time.
ADDITIONAL MATTERS
COMPETITION
The Company competes with many different companies for its impaired
loans. Sources of competition include private investors, banks and thrifts,
investment bankers, and venture capital funds. Many of these sources have
substantially greater financial resources and lower costs of capital than the
Company has available to it. The number and quality of competitors for any one
loan package changes dramatically depending upon circumstances unique to the
package. Typically competition is based solely on price and the ability to pay
cash. Therefore to achieve its investment goals, the Company has to rely upon
the Adviser's ability to review a significant amount of impaired loan offerings
and to be able to properly bid on the offerings.
ANNUAL SHAREHOLDERS' MEETING. The 1998 Annual Shareholders' Meeting
will be held at 1:30 p.m. on Tuesday, April 28, 1998, at the offices of
Duncan-Smith Co., 311 Third Street, 3rd Floor, San Antonio, Texas 78205. All
Shareholders are welcome to attend.
ITEM 2. PROPERTIES.
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Except for certain foreclosed-upon properties that may be held by a
subsidiary of Plymouth, the Company does not own or lease any physical
properties or other tangible assets. Its business premises are furnished to it
by the Adviser.
ITEM 3. LEGAL PROCEEDINGS.
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The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings other than ordinary routine
proceedings incidental to the business of the Company. Such routine
proceedings primarily consist of foreclosure actions brought by the Company,
to realize value from its security interests in real property and other
collateral underlying its portfolio loans. To the best knowledge of the
management of the Company, there are no material legal proceedings contemplated
or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matters were submitted for the vote of Plymouth's Shareholders
during the fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MARKET
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MARKET INFORMATION
There is no established public trading market for the Company's common
shares of beneficial interest (the "Shares"). The Shares are not listed on the
NASDAQ Stock Market or any national securities exchange, and the Company has no
present intention to seek any such listing.
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HOLDERS
On March 20, 1998 the Company had 67 Shareholders of record.
DIVIDENDS
Pursuant to the stated objective of making quarterly distributions of
the Company's net income, Plymouth made four dividend declarations during the
1997 fiscal year for a total of $508,597 ($0.55 per share). The dividends
were:
Dividends for the 1 quarter 74,213 ($0.08 per share)
Dividends for the 2 quarter 6,176 ($0.01 per share)
Dividends for the 3 quarter 153,207 ($0.16 per share)
Dividends for the 4 quarter 275,001 ($0.30 per share)
The Company made one dividend distribution during the 1996 fiscal year
of $69,501 ($0.31 per Share).
The Company intends to distribute substantially all of its annual net
income as calculated for federal income tax purposes. Shareholder
distributions are expected to be made in the month following the end of each
calendar quarter. Subject to declaration by the Board of Trustees, the Company
intends to make distributions on a quarterly basis according to the following
schedule: 25% of its net income for the first quarter; 50% of its net income
for the first six months of each year less the previous distribution; 75% of
its net income for the first nine months of each year less both previous
distributions; and 100% of its net income for each year less all previous
distributions.
SALES OF UNREGISTERED SECURITIES
The following transactions involved the offering of Shares pursuant to
the private placement exemption available under section 4(2) of the Securities
Act. All the Shares issued thereby are considered restricted securities. They
are not listed on the NASDAQ Stock Market or any national securities exchange.
There is no market for these Shares nor is a market expected to develop.
On September 3, 1996, the Company sold 50 Shares to Robert R. Swendson
for aggregate proceeds to the Company of $500 ($10.00 per Share). Mr.
Swendson is the President and Chief Executive Officer of the Company and an
"accredited investor" within the meaning of Rule 501(a) under the Securities
Act.
On September 27, 1996 the Company issued and sold 221,577 Shares in
exchange for outstanding securities of and other interests in SWF-95 held by
the general partner, certain limited partners, and certain subordinated note
holders. The offering was made pursuant to a confidential private placement
memorandum that had offered a maximum of 293,897 Shares.
On December 26, 1996, the Company issued and sold 700,000 Shares
resulting in gross cash proceeds to the Company of $7,000,000 ($10.00 per
Share). The sale was made to current Company Shareholders and "accredited
investors" within the meaning of Rule 501(a) under the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------------------------------------------------------
Plymouth began operating in the September of 1996. As such, the
financial information presented below for the 1996 fiscal year is for only
three months of operations as compared to a full twelve months for fiscal year
1997.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
----------- -----------
<S> <C> <C>
Net investment loss $(621,882) $(168,039)
Realized gains on the sale of investments 987,363 202,431
Change in net unrealized appreciation on investments 183,077 (269,219)
Equity in earnings (loss) of affiliate (214,047) 76,118
Net increase (decrease) in net assets from operations 334,511 (158,709)
Per Share 0.36 (0.16)
Net Assets 8,418,160 8,592,246
Per Share 9.13 9.32
Distributions to Shareholders 508,597 69,501
Per Share 0.55 0.31
</TABLE>
For purposes of calculating per share distributions, the number of
Shares outstanding on the distribution's record date was used ( 921,627 shares
in 1997 and 221,627 shares in 1996). All other per share values are based on
the number of shares outstanding at the end of the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
The information contained in this section should be read in
conjunction with the Company's financial statements and notes.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year - 1997
As of December 31, 1997 Plymouth had $8,418,160 in net assets and had
borrowed an additional $7,981,158 which it has invested in impaired loans.
Plymouth attempts to be fully invested at all times. When Plymouth is fully
invested, it has minimal cash on hand and is close to fully extended on its
credit line. Because of the short holding time of its portfolio and Regulated
Investment Company (RIC) distribution requirements, the amount of capital that
the Company has available for investment can only grow when new equity is
raised. At the end of 1997, Plymouth had $568,899 in cash that primarily
consisted of payments made by borrowers that were awaiting good funds before
being applied to the loan balance.
Plymouth's borrowings are limited to the lesser of $8,000,000 or the
calculated borrowing basis as described in the Borrowing section (on page 2).
At the end of the year, the Company had borrowed $7,981,158 of the $8,000,000
available and using the agreed upon calculation method had a borrowing base of
$8,571,769. Approximately 49% of the borrowing base is based on $6,947,246 in
loans that were purchased in late October 1997 and as such qualify for the 60%
availability bracket. When the age of the loans extends beyond 6 months,
borrowing availability will decline by 12% from 60% to 48% under the loan
agreement. The size of the decline means that Plymouth will need to have
significant collections in the first five months of 1998 to continue to comply
with the loan agreement. Theare is no assurance Plymouth will be able to make
these collections in 1998.(Please see discussion of interest coverage ratio
under Results of Operations Other Items.)
After making the October purchases, the Adviser believed that several
other opportunities existed before year-end to purchase loans. In anticipation
of additional purchases of loans at the end of 1997, Plymouth considered
raising new equity. However, when the opportunities did not materialize, plans
for the equity offering ceased.
In 1998, Plymouth does not expect any large capital expenditures apart
from new loan purchases.
9
<PAGE> 11
Fiscal Year - 1996
On December 31, 1996, Plymouth had $8,592,246 in net assets and no
indebtedness. The Company's loan portfolio at the end of fiscal 1996 consisted
of 25 loans with an aggregate fair value of $2,763,554. Plymouth also had cash
of $587,349 and short-term securities of $4,997,111 issued by government
agencies and short-term commercial paper. These temporary investments all
matured within three months. A portion of the cash held by Plymouth is
committed each afternoon on overnight repurchase agreements with a financial
institution. Each repurchase agreement is collateralized by securities issued
by the U.S. government or by U.S. government agencies with a market value of
at least 102% of the value of the cash Plymouth sells.
The Company has available to it a line of credit from a Texas
commercial bank. The line of credit had a borrowing ceiling of $1,800,000 on
December 31, 1996. This ceiling has been raised to $8,000,000 effective
February 14, 1997. The line of credit is described above in Item 1.
To raise its equity, Plymouth completed two separate transactions
during 1996. On September 27, 1996, the Company acquired assets with a fair
value of $3,631,596 by issuing new equity valued at $2,246,456 and assuming
$1,385,140 in liabilities. On December 26, 1996, the Company completed a
private placement raising $6,574,000 in cash after paying offering costs of
$436,000.
On November 26, 1996, the Company placed a deposit of $100,000 with a
third party for a package of two legal judgments that it had committed to
purchase for a cost of $767,500. The transaction closed on January 16, 1997.
RESULTS OF OPERATIONS
Due to fact the Company was not in operation for an entire year in
1996 comparative analysis is not provided.
Fiscal Year - 1997
For the fiscal year, Plymouth had gross collections on impaired notes
of $7,695,241. Of this amount $6,241,406 was applied to principal, $466,472 to
interest, $403,304 to gain on collection (including two loans with a combined
principal balance of $20,000 written off), and $584,059 to gain on the sale of
loans. Plymouth invested excess cash (its cash balance over current
liabilities) in short-term investments that yielded $107,783 in income. The
Company incured $1,196,137 in operating expenses. The main expenses were
$553,671 in advisory fees, $251,611 in interest expense, and $173,049 in legal
expenses. The legal expenses mainly related to the collection of loans.
During the 1997 fiscal year, Plymouth and its wholly owned affiliate
Plymouth REO, Inc. purchased 141 loans at a cost of $19,636,489 to add to the
portfolio of 25 loans that it held at the end of 1996. The timing of these
purchases is as follows:
<TABLE>
<CAPTION>
Quarter Loans Cost
------- ----- ----
<S> <C> <C>
First Quarter 13 $2,525,774
Second Quarter 46 $4,908,552
Third Quarter 13 $2,268,524
Fourth Quarter 69 $9,933,639
</TABLE>
At the end of 1997, the Company had 106 loans with a cost of
$14,538,157 and a fair market value of $15,295,698, resulting in unrealized
appreciation of $757,541. Only the net change in unrealized appreciation from
1996 to 1997 of $183,077 is measured on the statement of operations.
The Company has a wholly-owned affiliate, Plymouth REO, Inc., which
holds the real estate that is acquired through foreclosure or otherwise in
connection with Plymouth's debt portfolio. As of December 31,1997, Plymouth
REO, Inc. held one foreclosure judgment (as to which the foreclosure sale was
pending) and four real estate properties. Two properties were sold during 1997
for a combined gain of $54,873. Plymouth REO, Inc. reported an unrealized
10
<PAGE> 12
loss of $214,047, mostly due to a write down of the fair market value of the
judgment from its cost basis of $548,000 to $385,000. The Board wrote the
asset down because of concerns of the underlying value of the property.
The above operations resulted in a $334,511 net increase in assets in
accordance with generally accepted accounting principles (GAAP) before the 1997
distributions of $508,597 to the shareholders.
The 1997 distributionof $508,597 was based on a tax earnings of
approximately $500,000. The difference between GAAP and tax earnings can be
explained primarily by the difference in the timing of recognition of income,
gains, losses, expenditures, and accounting for transactions with Plymouth REO,
Inc. In 1997, Plymouth had higher tax earnings than the GAAP earnings for two
main reasons. The accounting for impaired loans for tax purposes calls for the
recognition of income earlier and the reduction of basis later than the GAAP
books, resulting in approximately $100,000 in additional tax earnings on the
same GAAP collections. Plymouth also recognized for tax purposes approximately
$90,000 in income on the collection of two Plymouth REO, Inc. loans that GAAP
treats as a reduction in investment in affiliate. The fair value adjustments
for GAAP purposes can have a significant impact on GAAP earnings compared to
tax earnings. However, in 1997 the net adjustment to the GAAP earnings to place
the Company and its wholly owned affiliate Plymouth REO, Inc. on the fair
value method was minimal. The fair value fluctuations are also influenced by
the initial markup to fair market value of the loans acquired from SWF 1995
Limited Partnership. Plymouth's per share declined $.19 cents as result of the
GAAP appreciation on the initial exchange and dividends paid to date.
Fiscal Year 1996
The Company began operations on September 27, 1996, with the
acquisition of SWF-95. At the end of fiscal 1996, the Company's impaired loan
portfolio had an aggregate contractual principal balance of $4,390,036 and an
aggregate fair value of $2,763,554. Of the 25 borrowers, fourteen were
delinquent with their required payments. Seven loans with an aggregate
contractual principal balance of $1,346,671 and an aggregate fair value of
$657,613 were in the foreclosure process.
For fiscal 1996, Plymouth recorded $54,510 in investment income. Of
this amount, $48,955 resulted from interest actually received from the
Company's impaired loan portfolio. Because of the uncertainty related to its
impaired loan portfolio, Plymouth records interest income only as it is
received.
Plymouth realized gains of $202,431 as a result of the settlement of
three loans for total proceeds of $681,120. The obligations were settled for
amounts greater than SWF-95's initial purchase price and at a discount to the
contractual principal and accrued interest balance.
The Company also recorded total unrealized gains of $574,464 as a
result of the adjustments made by the Board of Trustees to bring the loans to
their fair value. Such an adjustment is prescribed by GAAP.
Expenses for the period were $222,549. Approximately $190,000 in
costs related to the formation of Plymouth were deducted from shareholders'
equity directly and not recorded on the Company's statement of operations.
Professional fees accounted for the largest single expense. The fees included
accounting and audit expense and legal expenses for debt collection, for
researching and complying with securities law, and for negotiating the Credit
Facility loan agreement.. The Adviser received total fees of $32,322 for the
months of November and December. The Adviser did not collect any fees during
the months of September and October because the Company's BDC election did not
become effective until November 26, 1996.
Plymouth distributed $69,501 in cash to Shareholders of record as of
December 15, 1996. Management believes that this amount satisfied the
distribution requirements of subchapter M of the Internal Revenue Code.
OTHER ITEMS
The Company currently has 11 loans (including the judgment of
foreclosure held by Plymouth REO,Inc .) and two real estate properties with
fair values that are more than $10,000 below cost. If Plymouth settled for the
estimated fair value it would realize a loss of $759,198 (this decline is
already reflected in the GAAP financials). This would
11
<PAGE> 13
significantly reduce the tax earnings and distributions to shareholders.
Actual settlements could be more or less than the estimated current fair
values.
Plymouth's strategy is to settle or sell the loans in its portfolio in
a 24 month period. In 1997, 60 loans were settled or sold and the average
holding time on those loans was ten months (including the holding period of
SWF-95 before the tax free exhange). At the end of 1997, Plymouth had 115 loans
with an average holding time of five months. As 1998 progresses, more of those
loans will move into the holding period where Plymouth's loans have
historically been resolved. Plymouth can give no assurance that the Adviser
will be able to settle the loans in the same time period as it has previously,
and the average holding time is not weighted for size of loan.
Plymouth recorded significant collections in the third and fourth
quarter of 1997. This pace has not continued into 1998. The slow down of
collections when coupled with the large October purchases has resulted in lack
of liquidity. In addition ,the company failed to meet the interest coverage
loan covenant in February,1998. This covenant imposes a minimum ratio between
income and interest expense. Plymouth may be in and out of compliance during
1998 due to the nature of purchasing and collecting impaired loans.
RISK FACTORS
The Company has a very limited operating history and is involved in a
highly speculative business that involves risk. Among other things, the
following items could have material impact on the Company's ability to
effectively conduct business:
Risks Regarding Purchasing and Resolving Impaired Loans. As described
in Item 1 above, the Company purchases loans where the borrower is not making
the contractual payments. Such loans are inherently risky. Certain items
related to the credit quality of the loans that may or may not have been
identified by the Adviser prior to investing in the loans could mean that the
amount that the Company seeks to collect cannot be collected. Additionally,
because the borrowers typically have not met their prior contractual
obligations, the timing of actual collections can vary. A significant variance
in collection timing would lower Shareholder's returns.
Leverage. The Company has established a line of credit with a Texas
bank that will be used to invest in impaired loan packages. The use of
leverage is intended to improve the Shareholder's overall return. However,
such borrowings must be repaid first and to the extent that the Company cannot
collect more than the cost of the loan that it purchased, leverage may
adversely affect Shareholder returns. Because the interest rate being charged
by the Credit Facility is based on a floating prime rate, rising interest rates
would also negatively affect the returns to Shareholders. In addition, because
borrowing availability under the credit facility declines the longer the loan
is held, the Company's ability to purchase new loans or to maximize collections
on its loan portfolio would be negatively affected if a significant amount of
the loans are not collected in a timely manner.
Regulatory Compliance. As the BDC description in Item 1 demonstrates,
the Company is highly regulated. Such regulations limit the types and amount of
impaired loans that the Company may invest in and restrict the manner in which
the loans may by resolved by limiting the amount of income that may come from
assets that are not securities. In certain circumstances, such restrictions
could require the Company to act in a manner that is not entirely consistent
with its investment objectives. If Plymouth does not comply with these
regulations, its ability to pass through its investment income and gains to
Shareholders without paying federal income taxes could be jeopardized.
Environmental Considerations. The various types of real estate
properties, which secure the impaired loans held by the Company, and the
businesses that operate at those properties are subject to federal, state, and
local environmental laws. These laws, and related causes of action, could
diminish the value of this property in the event the property is discovered to
contain materials that are regulated by federal and local environmental laws.
Companies who hold a security interest in an environmentally impacted property
generally are exempted from any liability for the violations unless they become
involved in the management of the property and are deemed "operators." If the
Company was deemed to be an "operator" for liability purposes, the Company
could be liable for cleanup costs, even if it did not know of and was not
responsible for the presence or release of the hazardous or toxic substances.
Such costs could exceed the value of the Company's investment.
12
<PAGE> 14
Competition. The Company competes with many different companies for
its impaired loans. Sources of competition include private investors, banks and
thrifts, investment bankers, and venture capital funds. Many of these sources
have substantially greater financial resources and lower costs of capital than
the Company has available to it. The number and quality of competitors for any
one loan package changes dramatically depending upon circumstances unique to
the package. Typically competition is based solely on price and the ability to
pay cash. Therefore to achieve its investment goals, the Company has to rely
upon the Adviser's ability to review a significant amount of impaired loan
offerings and to be able to properly bid on the offerings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------------------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -------------------------------------------------------------------------------
The information required for this item is attached as pages F-1 through
F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- -------------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------------------------
BOARD OF TRUSTEES
Information in response to this item is incorporated by reference to
the identification of trustees and nominees contained in the section entitled
"Election of Trustees" and the subsection entitled "Compliance with Section
16(a) of the Securities Exchange Act of 1934" of Company's definitive proxy
statement to be filed on or about April 8, 1998. Information in response to
the item is also included under the capital "Employees and Officers" of this
report.
The following table describes the occupations of Plymouth's Trustees:
<TABLE>
<CAPTION>
Name and Address Current Occupation
---------------- ------------------
<S> <C>
Dr. Ronald K. Calgaard President of Trinity University.
James R. Clifton Private investor.
Goodhu e W. Smith, III* Investment banker with Duncan-Smith Co. and President
of Duncan-Smith Securities, Inc., a registered
broker/dealer.
Robert R. Swendson* President and Chief Executive Officer of Plymouth and
the Adviser.
Willis H. Wagner Managing Director of SV Capital Management, a venture
capital firm.
</TABLE>
- -----------------
* "Interested Person" as defined by the 1940 Act.
13
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION.
- -------------------------------------------------------------------------------
Information in response to this item is incorporated by reference to
the section captioned "Compensation of Executive Officers and Trustees" of the
Company's definitive proxy statement to be filed on or about April 8, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
- -------------------------------------------------------------------------------
Information in response to this item is incorporated by reference to
the section captioned "Beneficial Ownership of Common Stock" of the Company's
definitive proxy statement to be filed on or about April 8, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------------------------------
Information in response to this item is incorporated by reference to
the subsection captioned "Certain Transactions and Business Relationships" of
the Company's definitive proxy statement to be filed on or about April 8,
1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM
8-K.
- -------------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS FORM 10K.
Audited Financial Statements for the fiscal year
ended December 31, 1996:
Independent Auditors' Report . . . . . . . . . . . . . . F-2
Statement of Assets and Liabilities . . . . . . . . . . F-3
Statement of Investments . . . . . . . . . . . . . . . . F-4
Statement of Operations . . . . . . . . . . . . . . . . F-7
Statement of Changes in Net Assets . . . . . . . . . . . F-8
Statement of Cash Flows . . . . . . . . . . . . . . . . F-9
Selected Per Share Data and Ratio . . . . . . . . . . . F-10
Notes to Financial Statements . . . . . . . . . . . . . F-11
(b) REPORTS ON FORM 8K.
None.
(c) EXHIBITS.
(3)(i) (A) Certificate of Trust of the Company as filed August 23,
1996 (1)
(B) Declaration of Trust of the Company, dated August 23,
1996 (1)
(3)(ii) Bylaws of the Company, dated September 3, 1996 (1)
(4) (A) Loan Agreement between Comerica Bank-Texas and the
Company, dated September 27, 1996 (2)
(B) Agreement to furnish to the Commission upon request a
copy of the Subordinated Note Agreement between the
Company and SouthWest Federated Holding Company, Inc.,
dated September 27, 1996 (2)
14
<PAGE> 16
(10) (A) Investment Advisory Agreement by and between the
Company and Emerald Advisers, Inc. (former name of
Greystone Advisers, Inc.), dated September 22, 1996 (2)
(B) Custodial Agreement by and between Comerica Bank-Texas
and the Company, dated September 27, 1996 (2)
(21) Legal name, jurisdiction of organization, and doing
business as name of each subsidiary of the Company(2)
(27) Financial Data Schedule- Filed herewith.
- ----------------------
(1)Incorporated herein by reference from the registrant's initial registration
statement on Form 10 (File No. 0-21443), as filed with the Commission on
September 27, 1996.
(2)Incorporated herein by reference from amendment #1 of the registrant's
initial registration statement on Form 10 (File No. 0-21443), as filed with
the Commission on January 15, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
PLYMOUTH COMMERCIAL MORTGAGE FUND
By /s/ ROBERT R. SWENDSON
------------------------------------------
Robert R. Swendson, Trustee, President and
Chief Executive Officer
Date March 20, 1998
------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ ROBERT R. SWENDSON
------------------------------------------
Robert R. Swendson, Trustee, President and
Chief Executive Officer
Date March 20, 1998
------------------------------------------
By /s/ JOHN C. MOSHER
------------------------------------------
John C. Mosher, Vice President and Chief Financial Officer
Date March 20, 1998
------------------------------------------
By /s/ RONALD K. CALGAARD
------------------------------------------
Dr. Ronald K. Calgaard, Trustee
15
<PAGE> 17
Date March 20, 1998
------------------------------------------
By /s/ JAMES R. CLIFTON
------------------------------------------
James R. Clifton, Trustee
Date March 20, 1998
------------------------------------------
By /s/ GOODHUE W. SMITH, III
------------------------------------------
Goodhue W. Smith, III, Trustee
Date
------------------------------------------
March 20, 1998
By /s/ WILLIS H. WAGNER
------------------------------------------
Willis H. Wagner, Trustee
Date
------------------------------------------
March 20, 1998
16
<PAGE> 18
PLYMOUTH COMMERCIAL
MORTGAGE FUND
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-1
<PAGE> 19
Independent Auditors' Report
The Board of Trustees and Shareholders
Plymouth Commercial Mortgage Fund
We have audited the accompanying statements of assets and liabilities of
Plymouth Commercial Mortgage Fund as of December 31, 1997 (including the
statement of investments) and 1996, and the related statements of operations,
cash flows, changes in net assets, and financial highlights for the year ended
December 31, 1997 and for the period September 27, 1996 (inception of
operations) to December 31, 1996. These financial statements and 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 audits to
obtain reasonable assurance about whether the financial statements and per
share data and ratios 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 confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. 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 financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Plymouth Commercial Mortgage Fund as of December 31, 1997 and 1996, and the
results of its operations, cash flows, changes in net assets, and financial
highlights for the year ended December 31, 1997 and for the period September
27, 1996 (inception of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
February 11, 1998
San Antonio, Texas
F-2
<PAGE> 20
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statements of Assets and Liabilities
December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
Assets 1997 1996
------- ---- ----
Investments in securities at fair value, cost
of $14,538,157 and $2,189,090, respectively $ 15,295,698 2,763,554
Investments in affiliates 941,477 130,566
Cash and short-term investments 568,899 5,082,109
Repurchase agreement - 502,351
Accounts receivable 2,026 6,451
Organization costs 72,800 104,000
Other assets - 103,641
-------------- ------------
Total assets $ 16,880,900 8,692,672
============== ============
Liabilities
-----------
Accounts payable $ 48,547 66,822
Investment advisory fee payable 77,110 16,677
Dividend payable 275,001 -
Note payable 7,981,158 -
Escrow funds 80,924 16,927
-------------- ------------
Total liabilities 8,462,740 100,426
-------------- ------------
Net Assets
-----------
Common shares of beneficial interest, no par
value, 1,750,000 shares authorized, 921,627 shares
issued and outstanding 7,976,773 7,976,773
Accumulated undistributed net investment loss (789,921) (168,039)
Accumulated undistributed net realized gains net of
distributions declared of $578,098 and
$69,501, respectively 611,696 132,930
Accumulated undistributed equity in earnings of subsidiary (137,929) 76,118
Accumulated undistributed unrealized gain on investments 757,541 574,464
-------------- ------------
Total net assets ($9.13 and $9.32 per share) 8,418,160 8,592,246
-------------- ------------
Total liabilities and net assets $ 16,880,900 8,692,672
============== ============
</TABLE>
(Continued)
F-3
<PAGE> 21
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statement of Investments
December 31, 1997
<TABLE>
<CAPTION>
Original Stated Outstanding
Location of Contract Interest Principal Fair
Eligible Portfolio Investments Property Maturity Rate Balance Value
<S> <C> <C> <C> <C> <C>
Commercial Loans -
Valued at fair value as determined by
Board of Trustees (note 2)
Loan secured by an office building NJ 10/31/97 11.50% $795,000 502,593
Loan secured by commercial building NJ 09/01/98 9.50% 427,392 370,000
Loan secured by an office building NJ 01/01/00 9.25% 366,204 275,361
Loan secured by an office building NJ 05/01/98 9.50% 384,539 275,000
Loan secured by an apartment building NJ 02/01/14 10.00% 315,683 268,679
Loan secured by an auto garage NJ 01/01/15 9.50% 288,213 240,445
Loan secured by an office building NJ 05/31/97 9.50% 234,750 234,750
Loan secured by an office warehouse NJ 01/01/97 8.13% 270,036 231,193
Loan secured by a small office NJ 09/01/19 8.75% 395,683 217,358
Loan secured by a bar NJ 11/01/92 13.00% 470,793 200,000
Loan secured by an office condominium NJ 06/01/15 9.50% 201,086 164,682
Loan secured by residential property NJ 08/01/93 9.25% 168,363 150,778
Loan secured by a residential condo NJ 11/01/19 8.38% 285,370 150,000
Loan secured by a commercial retail building NJ 10/01/08 10.00% 158,161 131,756
Loan secured by a car dealership NJ 05/04/99 9.50% 172,323 118,385
Loan secured by an apartment building NJ 11/01/06 11.25% 120,858 93,653
Loan secured by multi-family residential
property NJ 11/30/98 5.83% 211,845 92,222
Loan secured by a condominium NJ 06/01/15 9.50% 112,918 90,239
Loan secured by a commercial office building NJ 10/28/97 10.75% 282,594 89,500
Loan secured by a commercial office building NJ 10/01/94 6.19% 152,367 87,739
Loan secured by a commercial retail building NJ 12/21/95 9.00% 95,719 75,389
Loan secured by an apartment building NJ 07/01/00 10.00% 97,300 75,000
Loan secured by an apartment building NJ 03/01/01 9.50% 120,345 72,876
Loan secured by an apartment building NJ 06/01/00 10.50% 121,054 72,876
Loan secured by an apartment building NJ 03/01/94 7.38% 150,894 70,051
Loan secured by multi-family residential
Property NJ 04/01/07 9.00% 105,809 59,426
Loan secured by gas station NJ 06/01/00 10.00% 69,967 56,502
Loan secured by multi-family residential
property NJ 02/01/95 10.25% 62,738 54,459
Loan secured by commercial building NJ 01/01/94 10.50% 70,924 53,736
Total loans secured by property
in New Jersey (30% of
investments in securities) 4,574,648
Loan secured by an office building TX 03/01/01 9.25% 2,077,339 1,744,964
Loan secured by a movie theater TX 02/01/98 9.50% 1,882,879 1,600,447
</TABLE>
(Continued)
F-4
<PAGE> 22
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statement of Investments
December 31, 1997
<TABLE>
<CAPTION>
Original Stated Outstanding
Location of Contract Interest Principal Fair
Eligible Portfolio Investments Property Maturity Rate Balance Value
<S> <C> <C> <C> <C> <C>
Commercial Loans -
Loan secured by a warehouse TX 08/20/99 10.00% $527,747 443,307
Loan secured by a multi-family residential
property TX 07/01/99 8.00% 507,435 220,000
Loan secured by a church TX 12/21/00 9.50% 165,296 97,500
Loan secured by a commercial office building TX 10/01/98 9.50% 75,000 63,750
Total loans secured by property
in Texas (27% of investments
in securities) 4,169,968
Loan secured by a garage NY 05/01/95 11.50% 601,779 475,000
Loan secured by a commercial retail building NY 03/01/05 5.41% 641,288 439,806
Loan secured by multi-family residential
property NY 01/15/91 14.25% 1,529,140 432,915
Loan secured by multi-family residential
property NY 11/30/98 5.83% 316,234 141,626
Loan secured by a commercial retail building NY 06/01/98 9.50% 182,416 115,000
Loan secured by multi-family residential
property NY 07/01/07 10.00% 177,150 112,500
Loan secured by a commercial building NY 07/16/99 9.50% 119,460 102,375
Loan secured by multi-family residential
property NY 11/30/98 5.83% 209,699 95,515
Total loans secured by property
in New York (13% of investments
in securities) 1,914,737
Loan secured by a fast food restaurant CA 05/01/00 9.25% 373,607 313,830
Loan secured by an auto garage CA 08/01/00 9.50% 299,899 224,924
Loan secured by an office building CA 09/02/96 7.87% 369,977 178,876
Loan is unsecured CA 05/25/99 12.00% 198,691 175,000
Loan secured by a commercial office building CA 01/01/01 185,000 120,000
Loan secured by medical offices and related
fixtures CA 07/26/01 12.00% 149,158 103,841
Loan secured by medical offices and related
fixtures CA 02/01/97 8.00% 141,628 89,410
Total loans secured by property
in California (8% of investments
in securities) 1,205,881
Loan secured by an apartment building PA 07/01/99 10.00% 426,525 350,000
Loan secured by a car dealership PA 12/24/11 8.00% 199,903 174,032
Loan secured by sports facility PA 10/01/06 12.00% 150,100 140,700
Loan secured by multi-family residential
property PA 11/01/96 10.16% 251,849 131,250
Loan secured by an apartment building PA 12/01/96 9.93% 104,485 73,444
</TABLE>
(Continued)
F-5
<PAGE> 23
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statement of Investments
December 31, 1997
<TABLE>
<CAPTION>
Original Stated Outstanding
Location of Contract Interest Principal Fair
Eligible Portfolio Investments Property Maturity Rate Balance Value
<S> <C> <C> <C> <C>
Commercial Loans -
Loan secured by a commercial office
building PA 11/01/01 9.50% $74,186 69,300
Total loans secured by property
in Pennsylvania
(6% of investments in
securities) 938,726
Loan secured by an office building MA 06/01/00 10.50% 423,504 310,474
Loan secured by furniture and equipment MA 03/01/99 9.00% 257,364 200,000
Loan secured by commercial warehouse
building MA 02/20/03 11.75% 330,017 139,998
Loan secured by commercial warehouse
building MA 12/28/99 12.75% 147,568 132,998
Loan secured by a condominium MA 05/15/99 10.00% 116,818 87,653
Total loans secured by property
in Massachusetts
(6% of investments in
securities) 871,123
Loan secured by commercial warehouse
building FL 12/20/98 15.00% 175,826 131,869
Loan secured by a retail center FL 03/01/01 10.25% 121,728 102,251
Loan secured by commercial warehouse
building FL 11/01/00 10.00% 92,691 77,860
Loan secured by raw land FL 05/29/92 10.75% 199,740 60,000
Total loans secured by property
in Florida (2% of investments
in securities) 371,980
Loan secured by multi-family residential
property NH 11/21/97 8.00% 293,390 70,500
Loan secured by a commercial office building NH 09/30/96 7.00% 76,141 63,958
Total loans secured by property
in New Hampshire (1% of
investments in securities) 134,458
Loan secured by multi-family residential
property AL 07/01/05 9.21% 145,713 120,000
Loan secured by a commercial office
building VA 10/08/93 10.50% 506,402 100,000
Loan secured by a commercial office
building MD 06/01/17 10.50% 290,869 90,123
Loan secured by a retail center TN 11/15/96 7.00% 326,325 81,620
Loan secured by a commercial office
building and equipment RI 06/01/02 6.00% 250,000 76,983
1995 to 8.00% to
55 other commercial loans various 2010 18.00% 5,664,316 645,451
$15,295,698
</TABLE>
(Continued)
F-6
<PAGE> 24
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statements of Operations
For the year ended December 31, 1997 and the period September 27, 1996
(inception of operations) to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Investment income:
Interest on investments in securitues $ 466,472 48,955
Other investment income 107,783 5,555
-------------- ------------
Total income 574,255 54,510
Expenses:
Investment advisory fees 553,671 32,322
Interest expense 251,611 30,077
Operating expenses 217,806 73,415
Legal and professional fees 173,049 86,735
-------------- ------------
Total expenses 1,196,137 222,549
Net investment loss (621,882) (168,039)
Realized gain on sale of investments 584,059 202,431
Realized gain on collection of notes 403,304 -
Change in unrealized appreciation on investments 183,077 (269,219)
Equity in earnings of affiliate (214,047) 76,118
-------------- ------------
Net increase (decrease) in net assets resulting
from operations $ 334,511 (158,709)
============== ============
</TABLE>
(Continued)
F-7
<PAGE> 25
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statements of Changes in Net Assets
For the year ended December 31, 1997 and the period September 27, 1996
(inception of operations) to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Operations before distributions:
Net investment loss $ (621,882) (168,039)
Net realized gain on investments 987,363 202,431
Change in unrealized appreciation on investments 183,077 (269,219)
Equity in earnings of affiliate (214,047) 76,118
------------- ------------
Net decrease in net assets from operations
before distributions 334,511 (158,709)
Distribution to shareholders from:
Net realized gain on investments (508,597) (69,501)
Capital share transactions:
Proceeds from issuance of 700,000 shares on
December 26, 1996, net of issuance costs
of $426,000 - 6,574,000
-------------- ------------
Total increase (decrease) in net assets (174,086) 6,345,790
Net assets, beginning period 8,592,246 2,246,456
-------------- ------------
Net assets, end of period $ 8,418,160 8,592,246
============== ============
</TABLE>
(Continued)
F-8
<PAGE> 26
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statements of Cash Flows
For the year ended December 31, 1997 and the period September 27, 1996
(inception of operations) to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Increase (decrease) in net assets from operations before $ 334,511 (158,709)
distributions
Adjustments to reconcile increase in net assets from
operations before distributions to net cash used
by operating activities:
Amortization of organization costs 31,200 7,800
Change in unrealized appreciation on investments (183,077) 269,219
Equity in earnings of affiliates 214,047 (76,118)
(Increase) decrease in receivables 4,425 (6,451)
(Increase) decrease in other assets 103,641 (99,509)
Increase (decrease) in current liabilities 106,155 (684,714)
-------------- -----------
Net cash provided (used) by operating activities 610,902 (748,482)
Cash flows from investing activities:
Purchases of investments (18,590,473) -
Sales of investments/principal collection
on investments 6,241,406 391,793
Net change in investments in affiliate (1,024,958) -
------------- -----------
Net cash provided (used) by investing activities (13,374,025) 391,793
Cash flows from financing activities:
Increase from issuance of shares - 6,574,000
Distributions from net realized gain on investments (233,596) (69,501)
Proceeds from borrowings on notes payable 15,700,631 (600,000)
Repayment of notes payable (7,719,473) -
-------------- ----------
Net cash provided by financing activities 7,747,562 5,904,499
Net increase (decrease) in cash and cash equivalents (5,015,561) 5,547,810
Cash and cash equivalents at beginning of period 5,584,460 36,650
-------------- ------------
Cash and cash equivalents at end of period $ 568,899 5,584,460
============== ============
</TABLE>
(Continued)
F-9
<PAGE> 27
PLYMOUTH COMMERCIAL MORTGAGE FUND
Supplementary Information - Selected Per Share Data and Ratios
For the year ended December 31, 1997 and the period September 27, 1996 to
December 31, 1996 (inception of operations)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Per share data:
Investment income $ .62 .06
Expenses (1.30) (.24)
----------------- --------------
Net investment loss (.68) (.18)
Distributions from net investment loss - -
Net realized and unrealized gain (loss) on securities 1.27 (.07)
Distributions declared from realized gains
on securities (.55) (.31)
Equity in earnings of subsidiary (.23) .09
Capital adjustment from share issuance - (.35)
----------------- --------------
Net decrease in net asset value (.19) (.82)
Net asset value:
Beginning of period 9.32 10.14
----------------- --------------
End of period $ 9.13 9.32
================= ==============
Ratios:
Ratio of expenses to average net assets (%) (14)% (4)%
Ratio of net investment loss to average net assets (%) (7)% (3)%
Total return per net asset value per share 4% (5)%
</TABLE>
(Continued)
F-10
<PAGE> 28
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statements
December 31, 1997 and 1996
(1) Organization and Business Purpose
Plymouth Commercial Mortgage Fund, a Delaware business trust (the "Fund"),
was organized on August 23, 1996. The Fund seeks to achieve a high level
of current income. To achieve this objective, the Fund purchases impaired
loans typically secured by commercial real estate. The Fund has elected
to be regulated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended ("1940 Act").
The Fund was initially capitalized when Robert Swendson bought 50 common
shares of beneficial interest ("Shares") in the Fund for $500. The Fund
began operating on September 27, 1996 by acquiring in a tax free exchange
all of the interests of SWF 1995 Limited Partnership, a Texas limited
partnership ("SWF-95"), through an offer made to SWF-95's investors to
exchange their equity and subordinated debt interests for cash or equity
in the Fund. On September 27, 1996, the net asset value of SWF-95 was
$2,245,956 including $843,683 of unrealized gains on investments. The
Fund issued 221,577 Shares in connection with this transaction. SWF-95
was subsequently dissolved, and its assets are now held directly either by
the Fund or by Plymouth REO, Inc. ("Plymouth REO"), a Delaware corporation
which is a wholly-owned subsidiary of the Fund.
Pursuant to a private placement offering, the Fund issued and sold 700,000
Shares on December 26, 1996 for cash consideration in the amount of $10
per Share resulting in gross proceeds to the Fund of $7,000,000.
(2) Significant Accounting Policies
(a) Basis of Presentation - The financial statements included herein
have been prepared in accordance with generally accepted accounting
principles for financial information and the instructions to Form
10-K and Article 6 of Regulation S-X.
(b) Security Valuation - There is no publicly quoted market for the
Fund's impaired loan portfolio. As such, the fair value of the
portfolio is established by the Board of Trustees using their best
judgment. Such values are based upon what the Board believes the
Fund could reasonably expect to receive for each impaired loan in an
orderly disposition over a reasonable time period. For the first
six months after acquisition the value of an impaired loan is
typically its assigned cost unless some event occurs with respect to
the loan's issuer that warrants an upward or downward change in its
value as an asset of the Fund.
(Continued)
F-11
<PAGE> 29
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(2) Significant Accounting Policies, continued
In establishing the fair value of a loan, the Board considers
aspects about the individual loan as well as the general economy.
Such factors include but are not limited to: the type of loan,
whether the borrower is currently meeting the contractual terms of
the obligation, the length of time that the borrower has or has not
been meeting the contractual terms, the probability that the
borrower will begin or stop making payments, the value of the
collateral and the guarantees securing the loans, the Fund's
historical experience selling the type of loan being valued, various
standard financial measurements, the remaining contract terms, and
prevailing interest rates.
Certain elements of the valuation procedure involve subjective
judgment. Moreover, because the majority of the Fund's impaired
loans are delinquent, no assurance can be given that the Fund will
be able to recover the fair value that the Board has established.
The Fund's impaired loans are not typically backed by any government
guarantee or private credit enhancement. In many cases, the Fund
will also incur certain costs and delays in attempting to assert its
right to payment or in foreclosing on the loan's collateral. The
actual value realized on any particular loan will vary from the
values determined by the Board and can only be determined in
negotiations between the Fund and third parties.
In asserting its rights, the Fund may attempt to foreclose on a loan
and acquire the collateral. Pursuant to the terms of its credit
agreement, any real estate that is acquired through foreclosure is
held by Plymouth REO. Real estate held by Plymouth REO is recorded
at its estimated fair value and accounted for under the equity
method for GAAP purposes. At December 31, 1997, Plymouth REO held
two commercial properties in California, and commercial properties
in Florida and New York with fair values of $182,700, $158,000,
$115,000 and $73,257, respectively, as well as a judgement of
foreclosure secured by an office building in Puerto Rico with a fair
value of $385,000. These fair values are all determined by the
Board of Trustees of the Fund.
(c) Cash Equivalents - The Fund did not have cash equivalents at
December 31, 1997. Cash equivalents of $5,499,462 at December 31,
1996, consisted of short-term investments of $4,997,111 and a
repurchase agreement of $502,351. For purposes of the statement of
cash flows, the Fund considers all highly liquid debt instruments
with original maturities of three months or less to be cash
equivalents.
(Continued)
F-12
<PAGE> 30
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(2) Significant Accounting Policies, continued
(d) Investments in Affiliates - In accordance with generally accepted
accounting principles for investment companies, the investment in
the common stock of an affiliated company that is not another
investment company (Plymouth REO) is accounted for by the equity
method. The net worth of Plymouth REO reflects the fair value of
the underlying investments
(e) Federal Income Taxes - The Fund has elected the special tax
treatment available to "regulated investment companies" under
Subchapter M of the Internal Revenue Code ("IRC") in order to be
relieved of the Federal income tax on that part of its net
investment income and realized capital gains that it pays out to its
shareholders. The Fund's policy is to comply with the requirements
of the IRC that are applicable to regulated investment companies.
Such requirements include, but are not limited to certain qualifying
income tests, asset diversification tests, and the distribution to
its stockholders of substantially all of the Fund's taxable
investment company income and net capital gains. Management intends
to comply with these requirements, therefore no Federal income tax
provision is included in the accompanying financial statements.
(f) Distributions to Shareholders - Dividends to shareholders are
recorded on the record date. During the year ended December 31,
1997, and the period from September 27, 1996 (inception) to December
31, 1996, the Fund declared distributions of $508,597 and $69,501,
respectively, from accumulated undistributed net realized gains.
During the year ended December 31, 1997 and the period from
September 27, 1996 (inception) to December 31, 1996, the Fund paid
distributions of $233,596 and $69,501, respectively, from
accumulated undistributed net realized gains.
(g) Other - Principal and interest payments due on notes held by the
Fund are recognized on the date received. Interest income is
typically not accrued because of the impaired nature of the Fund's
loan portfolio.
(h) Organization costs - Organization costs were capitalized and are
being amortized on a straight line basis ending in April 2000.
(i) Fair Value of Financial Instruments - The carrying amounts of cash,
accounts receivable, accounts payable, and accrued expenses
approximate fair value because of the short maturity of these items.
The carrying amount of the notes payable pursuant to the Company's
credit facility approximates fair value because interest rates
change with market interest rates.
(2) Significant Accounting Policies, continued
(Continued)
F-13
<PAGE> 31
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(j) Management estimates - The financial statements have been prepared
in conformity with generally accepted accounting principles. The
preparation of the accompanying financial statements requires
estimates and assumptions made by management of the Fund that affect
the reported amounts of assets and liabilities as of the date of the
statement of assets and liabilities and income and expenses for the
period. Actual results could differ significantly from the
estimates.
(3) Investment Advisory Agreement
The Fund has entered into an Investment Advisory Agreement (the
"Agreement") with Greystone Advisers, Inc., a Delaware corporation, which
is registered as an investment adviser (the "Adviser") under the
Investment Advisers Act of 1940 (the "Adviser's Act"), as amended. Unless
terminated as described below, the Agreement remains in effect until
September 22, 1998. Thereafter it requires specific approval at least
annually by the Board of Trustees, including a majority of its members
casting their votes in person who are not "interested persons" of the Fund
(as defined by the 1940 Act) at a meeting called for the purpose of voting
on such approval or by "vote of a majority of the outstanding voting
securities" of the Fund. The Agreement can be terminated by the Fund at
any time, without payment of any penalty, on sixty days' written notice to
the Adviser if the decision to terminate has been made by the Board of
Trustees or by "vote of a majority of the outstanding voting securities"
of the Fund. The Agreement will terminate automatically in the event of
its assignment. An extension of the Agreement through September 22, 1999
is pending shareholder approval.
Under the Agreement, the Adviser manages the investments of the Fund,
subject to the supervision and control of the Fund's Board of Trustees.
Specifically, the Adviser will acquire, monitor, negotiate, work-out, and
dispose of the investments made by the Fund.
The Adviser is required to pay all expenses incurred by it in rendering
its services. Generally, these expenses include the cost of office space,
telephone service, equipment and personnel required to perform its
obligations under the Agreement. The Fund is required to pay its
operating expenses and reimburse the Adviser promptly for expenses which
the Adviser may pay on the Fund's behalf, except those specifically
required to be borne by the Adviser under the Agreement. Without
limitation, such expenses include: all expenses of any offering and sale
by the Fund of its shares; the fees and disbursements of the Fund's
counsel, accountants, and custodian; fees and expenses incurred in
producing and effecting filings with federal and state securities
administrators; costs of the Fund's periodic reports to and other
communications with the Fund's shareholders; fees and
(Continued)
F-14
<PAGE> 32
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(3) Investment Advisory Agreement, continued
expenses of members of the Fund's Board of Trustees who are not directors,
officers or employees of the Adviser; premiums for the fidelity bond
maintained by the Fund; all costs related to portfolio investments,
including without limitation financing costs, legal and accounting fees,
expenses related to protecting or maintaining the value of the loan
portfolio or its underlying collateral, and other professional or
technical fees and expenses (i.e., credit reports, title searches and
delivery charges, property taxes, insurance premiums, long-distance
telephone charges, title searches and delivery charges, property taxes,
insurance premiums, long-distance telephone charges, cost of specialized
consultants such as accountants or industry-specific technical experts,
and travel expenses) incurred in acquiring, monitoring, negotiating,
working-out, and effecting disposition of such investments, as well as
responding to any litigation arising therefrom; and all expenses related
to any borrowings by the Fund. During the term of this Agreement,
the Fund will pay to the Adviser, on the 15th day of each month: (a) a fee
calculated at an effective annual rate of 5.94% of the Fund's invested
assets as of the end of the previous month; and (b) a fee calculated at an
effective annual rate of 0.48% of the Fund's cash and short-term
investments as of the end of the previous month. For purposes of
calculating the fee to be paid on a monthly basis, "invested assets" means
the asset value as determined by the Board as of the end of the previous
fiscal quarter minus cash, short-term investments, intangible assets, and
the amount of collections applied to the carrying value of the loan
portfolio since the end of the previous quarter, plus the cost of loans
purchased and capitalized advances to protect portfolio investments or
underlying collateral since the end of the previous quarter.
(4) Investments
The Fund invests primarily in impaired loans of companies that qualify as
"eligible portfolio companies" as defined in Section 2(a)(46) of the 1940
Act or in securities that otherwise qualify for investment as permitted in
Section 55(a)(1) through (6). These loans are carried on the Statement of
Assets and Liabilities as of December 31, 1997 and 1996, at fair value, as
determined in good faith by the Fund's Board of Trustees.
These loans typically are offered at auction in packages of multiple
loans. Sellers include entities such as the Federal Deposit Insurance
Corporation ("FDIC"), banks, savings and loans, insurance companies and
other financial institutions. The Fund's investments in loan packages
will be directed by the Adviser.
(Continued)
F-15
<PAGE> 33
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(4) Investments, continued
Generally, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement unless the borrower receives material assistance. While several
types of impaired loans are available for purchase, the Fund concentrates
on purchasing impaired loans secured by commercial real estate.
The Fund invests in impaired loans nationwide typically through seal-bid
auctions. These auctions occur in different locations and from time to
time. The location of the loans and their collateral and the availability
of loans in different areas cannot be directed by the Fund or anticipated
in advance. Therefore, the Fund's impaired loan portfolio may be
concentrated in one geographic region of the United States or another from
time to time. As of December 31, 1997, the Fund's impaired loans were
primarily concentrated in the states of New Jersey, Texas, New York, and
California.
(5) Indebtedness
For the purpose of making investments and to take advantage of the
difference between the favorable interest rates available from lenders and
the expected rates of return from purchased loans, the Fund has
established a line of credit with a Texas commercial bank (the "Credit
Facility"). Such borrowings combined with any other outstanding senior
security representing indebtedness of the Fund will not exceed the maximum
amount permitted by the 1940 Act for a BDC.
As of December 31, 1997 and 1996, the Credit Facility had a borrowing
ceiling of $8,000,000 and $1,800,000, respectively. Debt outstanding at
December 31, 1997 was $7,981,158 and no debt was outstanding at December
31, 1996. The credit facility expires on September 27, 1998.
(Continued)
F-16
<PAGE> 34
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Financial Statments
(5) Indebtedness, continued
The Credit Facility is secured by a perfected first security interest in
the Fund's assets. The interest rate is based upon average borrowings
under this facility. For borrowings of up to $2.5 million for the
previous quarter, the interest rate on the Credit Facility is prime plus
1.5%; for average borrowings of between $2.5 million and $5.0 million for
the previous quarter, the interest rate is prime plus 1.0%; and for average
borrowings of more than $5.0 million for the previous quarter, the interest
rate is prime plus 0.5%. The bank's prime rate was 8.5% and 8.25% on
December 31, 1997 and 1996, respectively. A similar variable rate based on
the London Interbank Offered Rate is also available. Terms of the Credit
Facility include periodic third-party auditing, a lock box for receipt of
payments, custody by the lender of primary collateral, certain other fee
payments, and loan convenants with which the Fund was in compliance on
December 31, 1997. Included in interest expense of $251,611 are
commitments fees of $40,846 for the year ended December 31, 1997. No debt
was outstanding during 1996. During the year ended December 31, 1997,
interest payments totaled $251,611. There were no interest payments during
1996.
(6) Rights and Warrants
Pursuant to certain agreements dated September 22, 1996 (the "Agreements")
between the Fund and the Southwest Federated Holding Company ("SWFHC"),
the Fund has issued Class "A" and Class "B" Warrants to SWFHC. The
agreements provide that SWFHC receive warrants to purchase a total of
200,000 Shares. The Fund committed to issue warrants or rights to SWFHC
in consideration for SWFHC taking the financial risks attendant to
supporting the formation of the Fund. As of February 11, 1998, 150,000
Class "A" warrants and 50,000 Class "B" warrants have been issued to
SWFHC.
The Agreements provided for the issuance of the following classes of
warrants to the extent permitted by the 1940 Act:
(Continued)
F-17
<PAGE> 35
(6) Rights and Warrants, continued
1. The Class "A" Warrant Agreement provides for the issuance of
warrants to purchase 150,000 Shares at $10.00 per Share. The warrants
expire on September 22, 2006 and are exercisable only upon the condition
that by December 26, 1999, the Fund or one or more underwriters and
selling brokers or dealers on the Fund's behalf shall have received gross
cash proceeds of at least $10,000,000 from one or more sales of newly
issued Shares at an average price of at least $15.00 per Share (adjusted
proportionately for any Share dividends, splits, or combinations). These
warrants may be transferred or exercised in whole or in part from time to
time.
2. The Class "B" Warrant Agreement provides for the issuance of
warrants to purchase 50,000 Shares at the greater of $10.00 per Share or
net asset value per Share on the date of issuance. The warrants expire on
September 22, 2006 and are exercisable only upon the condition that by
December 26, 1999, the Fund or one or more underwriters and selling
brokers or dealers on the Fund's behalf shall have received gross cash
proceeds of at least $10,000,000 from one or more sales of newly issued
Shares at an average price of at least $20.00 per Share (adjusted
proportionately for any Share dividends, splits, or combinations). These
warrants may be transferred or exercised in whole or in part from time to
time.
Because of the significant risks and uncertainty relating to the
operations of the Fund, no value has been assigned to the Agreements and
the related issued rights and warrants or contingently issuable warrants.
(Continued)
F-18
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the
registrant's Statement of Assets and Liabilities as of December 31, 1997 and
Statement of Operations, Statement of Changes in Net Assets, and Statement of
Cash Flows for the period ended December 31, 1997 and is qualified in its
entirety by reference to such Statement of Assets and Liabilities, Statement of
Operations, Statement of Changes in Net Assets, and Statement of Cash Flows.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 14,538,157
<INVESTMENTS-AT-VALUE> 15,295,698
<RECEIVABLES> 2,026
<ASSETS-OTHER> 1,583,176
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,880,900
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,462,740
<TOTAL-LIABILITIES> 8,467,740
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,976,773
<SHARES-COMMON-STOCK> 921,627
<SHARES-COMMON-PRIOR> 921,627
<ACCUMULATED-NII-CURRENT> (789,921)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 611,696
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 619,612
<NET-ASSETS> 8,418,160
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 466,472
<OTHER-INCOME> 107,783
<EXPENSES-NET> 1,196,137
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</TABLE>