PMC COMMERCIAL TRUST /TX, S-11/A, 1996-06-19

PMC COMMERCIAL TRUST /TX
S-11/A, 1996-06-19
SHORT-TERM BUSINESS CREDIT INSTITUTIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996

FILE NO. 333-2757
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 2

TO
FORM S-11

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

PMC COMMERCIAL TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)

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

17290 PRESTON ROAD, DALLAS, TEXAS 75252
(214) 380-0044
(Address of Principal Executive Offices)

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

LANCE B. ROSEMORE, PRESIDENT
PMC COMMERCIAL TRUST
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(214) 380-0044
(Name and Address of Agent for Service)

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

Copies to:

<TABLE>
<S> <C>
KENNETH L. BETTS, ESQ. LEE A. MEYERSON, ESQ.
WINSTEAD SECHREST & MINICK P.C. SIMPSON THACHER & BARTLETT
5400 RENAISSANCE TOWER 425 LEXINGTON AVENUE
1201 ELM STREET NEW YORK, NEW YORK 10017
DALLAS, TEXAS 75270 (212) 455-2000
(214) 745-5400
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

PMC COMMERCIAL TRUST

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN PROSPECTUS
- ---- -------------------------------------------------- -----------------------------------
<C> <S> <C>
1 Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page and Outside
Back Cover Page
3 Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors;
Business
4 Determination of Offering Price................... Outside Front Cover Page
5 Dilution.......................................... Not applicable
6 Selling Security Holders.......................... Not applicable
7 Plan of Distribution.............................. Underwriting
8 Use of Proceeds................................... Use of Proceeds
9 Selected Financial Data........................... Selected Financial Data
10 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... Management's Discussion and
Analysis of Financial Condition and
Results of Operations
11 General Information as to Registrant.............. Business; Management; Certain
Provisions of the Texas REIT Act
and the Company's Declaration of
Trust and Bylaws
12 Policy with Respect to Certain Activities......... Business
13 Investment Policies of Registrant................. Prospectus Summary; Business
14 Description of Real Estate........................ Not applicable
15 Operating Data.................................... Not applicable
16 Tax Treatment of Registrant and Its Security
Holders........................................... Federal Income Tax Considerations
17 Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters..... Outside Front Cover Page; Price
Range of Common Shares; Dividends
and Distributions Policy;
Description of Shares of Beneficial
Interest
18 Description of Registrant's Securities............ Description of Shares of Beneficial
Interest
19 Legal Proceedings................................. Business
20 Security Ownership of Certain Beneficial Owners
and Management.................................... Principal Shareholders
21 Directors and Executive Officers.................. Management
22 Executive Compensation............................ Management; Investment Manager
23 Certain Relationships and Related Transactions.... Risk Factors; Investment Manager
24 Selection, Management and Custody of Registrant's
Investments....................................... Business; Investment Manager
25 Policies with Respect to Certain Transactions..... Business
26 Limitations of Liability.......................... Management; Description of Shares
of Beneficial Interest
27 Financial Statements and Information.............. Prospectus Summary; Selected
Financial Data; Financial
Statements
28 Interests of Named Experts and Counsel............ Experts; Legal Matters
29 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Not applicable
</TABLE>
<PAGE> 3

***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************

SUBJECT TO COMPLETION, DATED JUNE 19, 1996

2,000,000 SHARES

PMC COMMERCIAL TRUST
COMMON SHARES OF BENEFICIAL INTEREST

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

PMC Commercial Trust (the "Company") is a Texas real estate investment
trust that originates loans to small business enterprises which are primarily
collateralized by first liens on real estate of the related business. The
Company principally lends to small businesses in the lodging industry. The
Company also targets the commercial real estate, service, retail and
manufacturing industries. See "Business." The Company's investment advisor is
PMC Advisers, Inc., a wholly-owned subsidiary of PMC Capital, Inc. and an
affiliate of the Company. See "Investment Manager." The Company has elected to
be taxed as a real estate investment trust ("REIT") for Federal tax purposes.
See "Federal Income Tax Considerations."

All of the Common Shares of Beneficial Interest of the Company, $.01 par
value per share (the "Common Shares"), offered hereby are being sold by the
Company. In addition to the 2,000,000 Common Shares offered by the Underwriters
(the "Underwritten Offering"), the Company is offering, by means of this
Prospectus, 60,000 Common Shares (the "Direct Offering") directly to certain
officers and trust managers of the Company at the Price to Public net of
Underwriting Discount. Upon completion of the Underwritten Offering and the
Direct Offering (together, the "Offering"), the executive officers and trust
managers of the Company will beneficially own 3.5% of the issued and outstanding
Common Shares.

The Common Shares are listed on the American Stock Exchange under the
symbol "PCC." On June 17, 1996, the closing sales price of the Common Shares as
reported on the American Stock Exchange was $16.375 per share. See "Price Range
of the Common Shares." On May 23, 1996, the Company declared a quarterly
dividend of $0.38 per Common Share payable on July 15, 1996 to holders of record
as of June 28, 1996. Purchasers of Common Shares in the Offering will not be
entitled to receive such dividend. The Company has paid, and intends to continue
to pay, quarterly dividends to its shareholders. See "Price Range of Common
Shares" and "Dividends and Distributions Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $ (4)
===========================================================================================================
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.

(2) Before deducting expenses of the Offering estimated at $300,000 payable by
the Company.

(3) The Company has granted the Underwriters an option, exercisable, from time
to time, within 30 days, to purchase up to 300,000 additional Common Shares
at the Price to Public per share, less the Underwriting Discount, for the
purposes of covering over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

(4) Excludes $ to be received by the Company from the Direct Offering if
all Common Shares offered in the Direct Offering are sold.

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

The Common Shares are offered by the Underwriters when, as and if delivered
to and accepted by them, subject to their right to withdraw, cancel or reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the Common Shares will be
made against payment on or about , 1996 at the office of Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.

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

OPPENHEIMER & CO., INC.
J.C. BRADFORD & CO.
FAHNESTOCK & CO. INC.

The date of this Prospectus is June , 1996
<PAGE> 4

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR ON THE AMERICAN
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
can be examined without charge at, or copies obtained upon payment of the
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Such reports, proxy statements and other information
can also be inspected without charge, or copies obtained upon payment of the
prescribed fees, at the offices of the American Stock Exchange located at 86
Trinity Place, New York, New York 10006.

The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, with respect to the Common Shares offered pursuant to
this Prospectus. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and financial statement schedules thereto. For further
information with respect to the Company and the Common Shares offered hereby,
reference is made to the Registration Statement and such exhibits and financial
statement schedules, copies of which may be examined without charge at, or
obtained upon payment of prescribed fees from, the Commission and its regional
offices at the locations listed above.

Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.

The Company is required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
American Stock Exchange requirements, if any, holders of the Common Shares
receive annual reports containing audited financial statements with a report
thereon from the Company's independent public accountants, and upon request
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
description and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Glossary.

THE COMPANY

PMC Commercial Trust (the "Company") originates loans to small business
enterprises which are primarily collateralized by first liens on real estate of
the related business. The Company principally lends to small businesses in the
lodging industry. The Company also targets the commercial real estate, service,
retail and manufacturing industries. The Company, a Texas real estate investment
trust, was formed in June 1993, completed its initial public offering in
December 1993 and has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").

The Company lends primarily to borrowers involved in the lodging industry.
The majority of the Company's loans in the lodging industry are to
owner-operated facilities generally under national hotel or motel franchises. As
of March 31, 1996, (i) 96% of the Company's loan portfolio consisted of loans
for the acquisition, renovation and construction of hotels, and (ii) Days Inn
and Holiday Inn franchisees accounted for 20.3% and 18.5%, respectively, of the
Company's outstanding loan portfolio. Management believes that borrowers in the
hotel and motel franchise industry are underserved by traditional lending
sources. Based on statistics prepared by the Small Business Administration (the
"SBA"), SBA loans to the lodging industry had lower delinquencies and
charge-offs as compared to the average of all SBA loans for the ten year period
ended December 31, 1994. In addition, based on its lending history and the
lending history of PMC Capital, Inc., the Company believes that loans to such
lodging franchisees generally represent better credit risks than loans to other
types of hotel and motel businesses because such businesses (i) employ proven
business concepts, (ii) have consistent product quality, (iii) are screened and
monitored by franchisors, and (iv) generally have a higher rate of success as
compared to other independent lodging businesses.

From commencement of operations through March 31, 1996, the Company
originated or purchased 76 loans in an aggregate principal amount funded of
approximately $75 million. At March 31, 1996, all loans were paying as agreed,
and the Company had experienced no loan losses and no charge-offs. There can be
no assurance, however, that the Company will not experience loan losses and
charge-offs in the future. The loan amounts generally do not exceed the lesser
of 70% of the fair value or cost of the collateral.

The investments of the Company are managed by PMC Advisers, Inc. (the
"Investment Manager" or "PMC Advisers"), a wholly-owned subsidiary of PMC
Capital, Inc. (together with its subsidiaries, "PMC Capital"). The Company is an
affiliate of PMC Capital, which primarily engages in the business of originating
loans to small businesses under loan guarantee and funding programs sponsored by
the SBA. The predecessor to PMC Capital, Inc. was incorporated in 1979, and the
common stock of PMC Capital, Inc. is currently traded on the American Stock
Exchange.

3
<PAGE> 6

("Microtel"), will present and market to prospective Microtel franchisees the
Company's current financing programs. The third principal strategy of the
Company is to continue to obtain cost-effective financing to maximize its
growth. On March 12, 1996, the Company completed a private placement of
$29,500,000 of Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes"),
through a special purpose affiliate of the Company, PMC Commercial Receivable
Limited Partnership, a Delaware limited partnership (the "Partnership"). The
Company owns, directly or indirectly, all of the interests in the Partnership.
In connection with the private placement, the Notes received a "AA" rating from
Duff & Phelps Credit Rating Co.

The Company's principal executive offices are located at 17290 Preston
Road, Dallas, Texas 75252, and its telephone number is (214) 380-0044.

RISK FACTORS

An investment in the Common Shares involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to any investment in the Company. Such risks include, among others:

- Substantially all of the Company's outstanding loans were to businesses
in the lodging industry (96% at March 31, 1996).

- The Company's business is subject to the risk that borrowers will not
satisfy their debt service obligations and the risk that the value of the
collateral securing a loan may be insufficient to meet all obligations.

- The Company is dependent for the selection, structuring, closing and
monitoring of its investments on the officers of the Investment Manager.

- Many entities, as well as individuals, compete for investments similar to
those proposed to be made by the Company, some of whom have far greater
resources than the Company.

- The officers of the Company and the Investment Manager will be subject to
certain potential conflicts of interest.

- Interest rate mismatches could negatively impact the Company's net income
and dividend yield and the market price of the Common Shares.

- The Company will be taxed at corporate rates if it fails to maintain its
qualification as a REIT.

- The Company borrows for the purpose of investment leverage, which may be
considered a speculative investment technique.

4
<PAGE> 7

SUMMARY FINANCIAL AND OPERATING INFORMATION

The following table sets forth summary financial data of the Company and
should be read in conjunction with the financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. The
summary financial data below provides information about the Company's financial
history and may not be indicative of future operating results of the Company.
The data for the period from June 4, 1993 (date of inception) to December 31,
1993 and the years ended December 31, 1994 and 1995 has been derived from
audited financial statements. The data for the three months ended March 31, 1995
and 1996 has been derived from unaudited financial statements.

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993 YEARS ENDED THREE MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1993 1994 1995 1995 1996
------------------- ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans............ $ 3 $2,289 $5,610 $1,107 $1,795
Interest and dividends-
other investments............. $ 13 $1,222 $ 325 $ 230 $ 54
Other income..................... $ -- $ 180 $ 295 $ 84 $ 57
Total revenues................... $ 16 $3,691 $6,230 $1,421 $1,906
Expenses:
Advisory and servicing fees,
net........................... $ --(3) $ 357 $ 946 $ 161 $ 276
Interest......................... $ -- $ 37 $ 221 $ 16 $ 252
Other............................ $ 1 $ 97 $ 167 $ 59 $ 34
Total expenses................... $ 1 $ 491 $1,334 $ 236 $ 562
Net income......................... $ 15 $3,200 $4,896 $1,185 $1,344
Weighted average common shares
outstanding...................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
Net income per common share........ $0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
Dividends per common share......... $ --(3) $ 1.02 $ 1.38 $ 0.30 $ 0.37
Return on average assets(1)........ --(3) 6.5% 8.8% 9.1%(5) 7.5%(4)(5)
Return on average common
beneficiaries' equity(2)......... --(3) 6.9% 10.2% 10.0%(5) 11.1%(5)
</TABLE>

<TABLE>
<CAPTION>
AT END OF PERIOD
-----------------------------------------------
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Loans receivable.................................. $ 3,119 $32,694 $59,130 $62,958
Total assets...................................... $43,153 $51,785 $59,797 $83,165
Notes payable..................................... $ -- $ -- $ 7,920 $29,500
Beneficiaries' equity............................. $42,941 $47,440 $48,183 $49,001
Total liabilities and beneficiaries' equity....... $43,153 $51,785 $59,797 $83,165
</TABLE>

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

(1) Based on the Average Annual Value of All Assets. See "Glossary."

(2) Based on the total beneficiaries' equity on the first day of the year and on
the last day of each quarter of such year (i) divided by five for the years
ended December 31, 1994 and 1995 and (ii) divided by two for the three
months ended March 31, 1995 and 1996.

(3) Not applicable due to initial period of the Company's operations which
commenced on December 28, 1993.

(4) The decrease was primarily caused by the private placement of the Notes on
March 12, 1996.

(5) Percentage annualized.

5
<PAGE> 8

THE OFFERING

<TABLE>
<S> <C>
Common Shares Offered to the Public..... 2,000,000 Common Shares
Direct Offering......................... 60,000 Common Shares
Common Shares Outstanding After the
Offering(1)........................... 5,639,346 Common Shares
Use of Proceeds......................... The net proceeds to the Company are estimated to be
approximately $31.1 million. Initially,
substantially all of the net proceeds of the
Offering will be invested in temporary investments
of the types described under "Business -- Policies
with Respect to Certain Activities." As rapidly as
practicable thereafter, the net proceeds will be
used to make additional loans in accordance with
the Company's lending criteria.
AMEX Symbol............................. "PCC"
</TABLE>

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

(1) Excludes 13,990 shares issuable upon exercise of outstanding options under
the Company's 1993 Employee Share Option Plan and 1993 Trust Manager Share
Option Plan which are currently exercisable.

DIVIDENDS AND DISTRIBUTIONS POLICY

In accordance with applicable REIT requirements, the Company has to date
made distributions in accordance with the Code. The Company paid dividends per
share in the aggregate of $1.02, $1.38 and $0.37 for the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, respectively. See
"Price Range of Common Shares." On May 23, 1996, the Company declared a
quarterly dividend of $0.38 per Common Share payable on July 15, 1996 to holders
of record as of June 28, 1996. Purchasers of Common Shares in the Offering will
not be entitled to receive such dividend. The Company intends to continue to pay
regular quarterly dividends to its shareholders. See "Dividends and
Distributions Policy."

FEDERAL INCOME TAX CONSIDERATIONS

The Company has elected to be taxed as a REIT, commencing with its taxable
year ended December 31, 1993. As a REIT, the Company generally is not subject to
Federal income tax to the extent it distributes at least 95% of its REIT taxable
income (which does not include capital gains) to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to Federal income tax on its taxable income at regular corporate rates.
In addition, the Company would generally be disqualified from treatment as a
REIT for the four subsequent taxable years. See "Federal Income Tax
Considerations -- Requirements for Qualification as a Real Estate Investment
Trust."

6
<PAGE> 9

RISK FACTORS

An investment in the Company involves various investment risks. Prospective
investors should carefully consider the following factors together with the
information provided elsewhere in this Prospectus in evaluating an investment in
the Company.

CONCENTRATION OF INVESTMENTS

At March 31, 1996, approximately 96% of the Company's outstanding loans
were to small businesses in the lodging industry. There can be no assurance that
the Company will continue to experience the positive results it has historically
achieved from these lending activities or that market conditions will enable the
Company to maintain or increase this level of loan concentration. Any economic
factors that negatively impact this industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, at March 31, 1996 loans to businesses located in Texas and
Maryland comprised 31% and 11%, respectively, of the Company's outstanding loan
portfolio. An economic downturn in either of these states could have a material
adverse effect on the Company's business, financial condition and results of
operations.

As of March 31, 1996, Days Inn and Holiday Inn franchisees accounted for
20.3% and 18.5%, respectively, of the Company's outstanding loan portfolio. Any
economic factors that negatively impact such franchisors could have a material
adverse effect on the Company's business, financial condition and results of
operations.

CREDIT RISKS OF LOANS

The Company's lending business is subject to various risks, including, but
not limited to, the risk that borrowers will not satisfy their debt service
obligations and the risk that the value of the collateral securing a loan, after
payment and collection of foreclosure expenses, may be less than the principal
amount of such loan. In addition, because the Company's borrowers are small
businesses with more limited financial resources, smaller market shares, more
restricted access to funding sources, higher leverage and greater dependence on
the talents and efforts of one or a few people than larger, more established
companies, the Company assumes a greater risk of loss than might otherwise be
the case if it focused on lending to larger companies better able to withstand
business and economic downturns. The Company attempts to reduce its risk of loss
by evaluating each borrower's creditworthiness and the value of the collateral
securing each loan; by limiting the maximum amount loaned to any single
borrower; by taking security interests in assets, including real property and
furniture, fixtures and equipment, of the borrower and, in certain cases,
parties related to the borrower; and by obtaining personal guarantees. There can
be no assurances, however, that such actions will be sufficient to avoid losses.
With respect to business loans purchased, much of the information available to
the Investment Manager about such loans is generated at the time that the loan
was made by the original lending institution. This information may be largely
out-of-date when the Investment Manager considers the loan for purchase, and the
ability of the Investment Manager to obtain more current information may be
limited. At March 31, 1996, the Company had no loan delinquency greater than 30
days, and based upon management's assessment of the likelihood of payment in
full of the Company's outstanding loans, no loan loss reserve has been
established. Changes to the facts and circumstances of the borrower, the lodging
industry and the economy may result in the establishment of significant loan
loss reserves. In the event the Company experiences a loan loss, it could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Underwriting Criteria and Loan
Originations" and "-- Delinquency and Collections."

RELIANCE ON MANAGEMENT AND INVESTMENT MANAGER

The Company is dependent for the selection, structuring, closing and
monitoring of its investments upon the efforts and abilities of the officers of
the Investment Manager, Dr. Fredric M. Rosemore, the Investment Manager's
Chairman of the Board, Lance B. Rosemore, the Investment Manager's President and
Chief Executive Officer, and Dr. Andrew S. Rosemore, the Investment Manager's
Executive Vice President and

7
<PAGE> 10

Chief Operating Officer. The loss or interruption of the services of these
persons could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the directors and
officers of the Investment Manager also serve as directors and officers of PMC
Capital and its affiliates and devote such time as they deem appropriate to PMC
Capital and such affiliates. Although ultimate control of the Company lies with
the trust managers, the trust managers will rely primarily on the advice of the
Investment Manager with respect to operating decisions. Accordingly, the success
of the Company is dependent in large part on the services provided by the
Investment Manager. The Investment Management Agreement can be terminated by the
Investment Manager for any reason upon 60 days' prior written notice delivered
to the Company, pursuant to a majority vote of the independent directors of the
Investment Manager. Other than this notice requirement, there is no contractual
impediment to the termination of the Investment Management Agreement by the
parties thereto. At March 31, 1996, the Company had approximately $35.7 million
in loan commitments outstanding. In the event the Investment Management
Agreement were terminated, a significant portion of the then outstanding
commitments would no longer be required to be funded by the Company; however,
such commitments will remain the obligations of PMC Advisers. Although
management of the Company believes that the Company can obtain the services of
third party investment advisors or hire sufficient personnel to internally
manage the Company's investments in the event that the Investment Management
Agreement is not renewed or is terminated, no assurance can be given that the
Company could obtain alternative investment management services on similar terms
or in a timely manner or that the same quality of portfolio could be maintained.
Additionally, the Company may not independently originate or purchase mortgage
loans while the Investment Management Agreement is in effect. The Company's
inability to find an alternative investment manager on similar terms and its
lack of experience in originating loans could adversely influence the decision
of the Independent Trust Managers with respect to the renewal of the Investment
Management Agreement and could act as practical deterrents to the termination or
modification of the Investment Management Agreement by the Company. The Company
does not maintain "key man" life insurance on any of its officers or the
officers or employees of the Investment Manager. See "Management" and
"Investment Manager."

COMPETITION

Many entities, including banks, financial institutions, insurance companies
and other lending companies, including mortgage REITs, as well as individuals,
compete for investments similar to those proposed to be made by the Company,
some of whom have far greater resources than the Company. Competition has
increased as the financial strength of the banking and thrift industries has
improved. Increased competition makes it more difficult for the Company to
originate loans on favorable terms or purchase loans at attractive prices. The
principal competitive factors in the Company's business are the loan terms
offered to borrowers and the quality of service provided to borrowers. In
addition, PMC Capital may compete with the Company for certain loans; however,
to the extent that investment opportunities reviewed by the Investment Manager
conform to the investment criteria of the Company and the Company has funds
available to make such investments, such investments may be made by the Company
rather than PMC Capital. See "Conflicts of Interest; Transactions with
Affiliates" and "Business -- Loan Originations and Underwriting,"
"-- Competition" and "-- Policies with Respect to Certain Activities."

CONFLICTS OF INTEREST; TRANSACTIONS WITH AFFILIATES

The officers of the Investment Manager are also officers of PMC Capital and
in such capacities operate the business of PMC Capital and its subsidiaries. PMC
Capital and its subsidiaries have originated and purchased business loans
similar to the types of loans in which the Company invests and may do so in the
future under certain limited circumstances. The Investment Manager could also
establish or advise additional investment entities in the future for the purpose
of investing in business loans.

Pursuant to a loan origination agreement among the Investment Manager, PMC
Capital and the Company (the "Loan Origination Agreement"), loans which meet the
Company's underwriting criteria are to be funded by the Company provided that
funds are available. In such event, loans generally will not be made by PMC
Capital other than: (i) loans in an original principal amount not exceeding
$1,100,000 made pursuant to the SBA Section 7(a) or Small Business Investment
Company ("SBIC") loan programs utilized by PMC

8
<PAGE> 11

Capital's subsidiaries and (ii) bridge loans to be refinanced by SBA Section
7(a) or SBIC loans upon approval of the SBA loan application. Accordingly,
potential conflicts between PMC Capital and the Company with respect to loan
origination opportunities will be resolved in accordance with the criteria set
forth in the Loan Origination Agreement. See "Business -- Underwriting Criteria
and Loan Originations." The participation by PMC Capital in the business loan
market could make it more difficult for the Company to originate loans on
favorable terms or purchase business loans at attractive prices which could have
a material adverse effect on the Company's business, financial conditions and
results of operations.

The fee of the Investment Manager is primarily based on the value of the
Company's assets. As a result, any increases in the value of the Company's
assets from leverage will benefit the Investment Manager and the Investment
Manager will have a potential conflict in determining whether the Company should
write-down the value of any assets. The Investment Manager has agreed to a
reduced fee with respect to leveraged assets. In addition, the Annual Fee of the
Investment Manager will be earned only to the extent that the Company's annual
Return on Average Common Equity Capital, after deducting the Base Fee and the
Annual Fee, is at least equal to the minimum return of 6.69%. Consequently, the
Investment Manager could approve higher risk investments to maximize current
income in order to exceed 6.69% which could result in increased risk of loss to
the Company's assets. Because the maximum Annual Fee is 1% of the Average Annual
Value of All Invested Assets and is payable regardless of the amount of
distributions to shareholders as long as the minimum return of 6.69% is
attained, there may be no direct correlation between payment of the Annual Fee
and the amount of distributions to shareholders. See "Management" and
"Investment Manager."

INTEREST RATE AND PREPAYMENT RISK

The ability of the Company to achieve certain of its investment objectives
will depend in part on its ability to continue to borrow funds or issue
preferred shares of beneficial interest ("Preferred Shares") on favorable terms,
and there can be no assurance that such borrowings or issuances can in fact be
achieved. The Company's net income is materially dependent upon the "spread"
between the rate at which it borrows funds (typically either short-term at
variable rates or long-term at fixed rates) and the rate at which it loans these
funds (typically long-term at fixed rates). During periods of changing interest
rates, interest rate mismatches could negatively impact the Company's net income
and dividend yield and the market price of the Common Shares. If interest rates
decline, the Company may experience significant prepayments, and such
prepayments, as well as scheduled repayments, are likely to be reloaned at lower
rates, which may have an adverse effect on the Company's business, financial
condition and results of operations and on its ability to maintain distributions
at the level then existing.

ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

The Company must meet a number of highly technical and complex
requirements, described under "Federal Income Tax Considerations," to maintain
its status as a REIT under the Code. Failure to qualify as a REIT would result
in the taxation of the Company at corporate rates and loss of pass-through tax
treatment which would have a significant adverse effect on the Company's
business, financial condition and results of operations and on the return to
shareholders. Failure to qualify as a REIT under the Code during a taxable year
would generally render the Company ineligible to elect REIT status again until
the fifth subsequent taxable year. The Company will not be required to make
distributions to shareholders in the event that it fails to qualify as a REIT
under the Code and there can be no assurance that the Company will continue to
make distributions in such event. Transfers of the Common Shares are subject to
certain restrictions to protect the Company's REIT status under the Code. See
"Description of Shares of Beneficial Interest -- Restrictions on Transfer" and
"Federal Income Tax Considerations." In addition, the Company may be subject to
state or local taxes. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not change
the tax laws with respect to qualification as a REIT, the Federal income tax
consequences of such qualification or the application of state or local taxes to
the Company. Under legislation which became effective in 1992, certain entities
which employ leverage and whose assets consist principally of real estate
mortgages may be classified as taxable mortgage pools. To date, the Internal
Revenue Service has issued practically no guidance on the classification of
REITs as taxable mortgage pools and it is unclear

9
<PAGE> 12

whether the Company would ever be classified as one. Additionally, tax counsel
to the Company is rendering no opinion as to whether the Company would be
taxable as a mortgage pool. See "Federal Income Tax Considerations."

LEVERAGE

The Company has established a revolving credit facility, completed a
private placement of the Notes through the Partnership and may issue Preferred
Shares (although the Company has no current plans to do so) to acquire
additional funds to continue its lending activities. To the extent that the
Company utilizes its credit facility, executes notes or issues Preferred Shares,
the Company is leveraged. Lenders and preferred beneficiaries will have fixed
dollar claims on the Company's assets superior to the claims of the holders of
Common Shares and may require that the Company agree to covenants that could
restrict its flexibility in the future and may limit the Company's ability to
pay dividends. The Company's net income is materially dependent upon the
"spread" between the rate at which it borrows funds (typically either short-term
at variable rates or long-term at fixed rates) and the rate at which it loans
these funds (typically long-term at fixed rates). If the returns on loans
originated by the Company with funds obtained from borrowings or the issuance of
Preferred Shares fail to cover the cost of such funds, the Company's cash flow
will be reduced and could be negative. Additionally, any increase in the
interest rate earned by the Company on investments in excess of the interest
rate or dividend rate incurred on the funds obtained from either borrowings or
the issuance of Preferred Shares would cause its net income to increase more
than it would without the leverage. Conversely, any decrease in the interest
rate earned by the Company on investments would cause net income to decline by a
greater amount than it would if the funds had not been obtained from either
borrowings or the issuance of Preferred Shares and invested. Leverage is thus
generally considered a speculative investment technique. In order for the
Company to repay indebtedness or meet its obligations in respect of any
outstanding Preferred Shares on a timely basis, the Company may be required to
dispose of assets at a time at which it would not otherwise do so and at prices
which may be below the net book value of the loan. Dispositions of assets may
adversely affect the Company's business, financial condition and results of
operations and the Company's ability to maintain its qualification as a REIT for
Federal tax purposes. See "Business -- Policies with Respect to Certain
Activities" and "Federal Income Tax Considerations."

REMEDIES UPON DEFAULT

In the event of a default on a business loan, the Company's available
remedies would include legal action against the borrower or guarantor and
foreclosure against the collateral securing the loan. The Company could
experience significant delays in exercising its rights as a secured lender and
might incur substantial costs in foreclosing on the mortgaged property and
taking other steps to protect its investment. The Company's rights may, in some
instances, be subordinate to mechanics' liens, materialmens' liens or government
liens which could be significant in amount and which could, therefore, limit the
amount recovered by the Company. In addition, the Company's ability to obtain
payment from the borrower or guarantor to the extent of any deficiency resulting
after the sale of collateral might be limited by bankruptcy or similar laws.
Therefore, there can be no assurance that the Company would ultimately collect
the full amount owed on a defaulted loan.

ENVIRONMENTAL LIABILITIES

The Company may in the future acquire through foreclosure properties that
secured defaulted loans or make direct purchases of real estate. While the
Company performs extensive due diligence investigations into properties both
prior to originating loans secured by such properties and prior to foreclosing
thereon, there is a risk that hazardous substances or wastes, contaminants,
pollutants or sources thereof could be discovered on properties acquired by the
Company or with respect to which the Company is deemed to be an owner or
operator under applicable environmental laws. In such event, the Company could
be required under certain environmental laws to remediate such conditions and
clean up the affected property at its sole cost and expense or to contribute to
the cost of such remediation or clean up, which could have a material adverse
effect on the Company. In addition, the Company could be required to pay fines
and/or penalties imposed by governmental agencies. The Company requires
environmental site assessments of real estate securing loans it makes as a
condition to making such loans; however, there can be no assurance that such
assessments would reveal any or all potential environmental liabilities.

10
<PAGE> 13

CERTAIN LEGAL CONSIDERATIONS

Applicable state laws generally regulate interest rates and other charges,
require certain disclosures and require licensing of originators of loans. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
loans. Depending on the provisions of the applicable law and the specified facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Company to collect all or part of the principal of
or interest on its outstanding loans, could result in penalties to the Company
and may entitle the borrower to a refund of amounts previously paid.

The Company's loans are also subject to Federal laws, including:

(i) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and

(ii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.

Violations of certain provisions of these Federal laws may limit the ability of
the Company to collect all or part of the principal of or interest on its loans
and in addition could subject the Company to damages and administrative
enforcement. The Company believes that it is in compliance with all applicable
laws.

CHANGES IN INVESTMENT AND FINANCING POLICIES

The investment and financing policies of the Company and its policies with
respect to certain other activities, including growth, capitalization,
distributions, REIT status and operating policies, are established by the trust
managers. See "Business -- Policies with Respect to Certain Activities." The
trust managers may amend or revise these policies from time to time at their
discretion without a vote of the shareholders of the Company.

OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT

In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). To ensure that the Company will not fail to qualify as a REIT
under this test, the Declaration of Trust of the Company provides that no holder
of capital shares, other than any trust manager, employee of the Company and any
other person approved by the trust managers, may directly or indirectly own more
than 9.8% of the lesser of the number or value of the outstanding capital
shares; provided, however, in no event may the trust managers grant an exemption
from the foregoing ownership limitation to any trust manager, employee or other
person whose ownership, direct or indirect, of in excess of 9.8% of the lesser
of the number or value of the outstanding capital shares would result in the
termination of the Company's status as a REIT, which could have a material
adverse effect on the Company's business, financial condition and its results of
operations. There can be no assurance that there will not be five or fewer
individuals who will own more than 50% in value of the shares thereby causing
the Company to fail to qualify as a REIT. The ownership limits may discourage a
change of control of the Company and may also (i) deter tender offers for the
Common Shares, which offers may be attractive to the shareholders or (ii) limit
the opportunity for shareholders to receive a premium for their Common Shares
that might otherwise exist if an investor attempted to assemble a block of
Common Shares in excess of 9.8% in number or value of the outstanding Common
Shares or otherwise to effect a change of control of the Company. See
"Description of Shares of Beneficial Interest -- Restrictions on Transfer."

RISK FOR IRAS OR INVESTORS SUBJECT TO ERISA

Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider whether the investment

11
<PAGE> 14

of plan assets in the Common Shares satisfies the diversification requirements
of ERISA, whether the investment is prudent in light of possible limitations on
the marketability of the Common Shares, and whether such fiduciaries have
authority to acquire such Common Shares under their appropriate governing
instruments and Title I of ERISA. Also, fiduciaries of an individual retirement
account ("IRA") should consider that an IRA may only make investments that are
authorized by the appropriate governing instruments. See "ERISA Considerations."

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS

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

12
<PAGE> 15

THE COMPANY

The Company originates loans to small business enterprises which are
primarily collateralized by first liens on real estate of the related business.
The Company principally lends to small businesses in the lodging industry. The
Company also targets the commercial real estate, service, retail and
manufacturing industries. The Company has elected to be taxed as a REIT under
the Code. The Company, a Texas real estate investment trust, was formed in June
1993 and completed its initial public offering in December 1993.

The Company lends primarily to borrowers involved in the lodging industry.
The majority of the Company's loans in the lodging industry are to
owner-operated facilities generally under national hotel or motel franchises. As
of March 31, 1996, (i) 96% of the Company's loan portfolio consisted of loans
for the acquisition, renovation and construction of hotels, and (ii) Days Inn
and Holiday Inn franchisees accounted for 20.3% and 18.5%, respectively, of the
Company's outstanding loan portfolio. Management believes that borrowers in the
hotel and motel franchise industry are underserved by traditional lending
sources. Based on statistics prepared by the SBA, SBA loans to the lodging
industry had lower delinquencies and charge-offs as compared to the average of
all SBA loans for the ten year period ended December 31, 1994. In addition,
based on its lending history and the lending history of PMC Capital, the Company
believes that loans to such lodging franchisees generally represent better
credit risks than loans to other types of hotel and motel businesses because
such businesses (i) employ proven business concepts, (ii) have consistent
product quality, (iii) are screened and monitored by franchisors, and (iv)
generally have a higher rate of success as compared to other independent lodging
businesses.

The investments of the Company are managed by PMC Advisers, a wholly-owned
subsidiary of PMC Capital. The Company is an affiliate of PMC Capital, which is
a closed-end management investment company that operates as a business
development company under the Investment Company Act of 1940, as amended. PMC
Capital primarily engages in the business of originating loans to small
businesses under loan guarantee and funding programs sponsored by the SBA. The
predecessor to PMC Capital, Inc. was incorporated in 1979, and the common stock
of PMC Capital, Inc. is currently traded on the American Stock Exchange.

The Company's principal business objective is to maximize shareholder
returns by expanding its loan portfolio while adhering to its underwriting
criteria. The Company currently has three principal strategies to achieve this
objective. First, the Company expects to continue to benefit from the
established customer base of PMC Capital due to the referral system available
through PMC Advisers. Many of the Company's existing and potential borrowers
have other projects that are currently financed by PMC Capital; however, their
financing needs have grown over time and now exceed the limitations set for SBA
approved loan programs. In addition, borrowers who have financial strength and
stability in excess of the SBA loan program criteria represent continuing
lending opportunities. Second, the Company is seeking to expand its
relationships with national hotel and motel franchisors to secure a consistent
flow of lending opportunities. For example, on April 12, 1996, the Company
entered into a marketing agreement with USFS whereby USFS, through its
wholly-owned subsidiary, Microtel, will present and market to prospective
Microtel franchisees the Company's current financing programs. The third
principal strategy of the Company is to continue to obtain cost-effective
financing to maximize its growth. On March 12, 1996, the Company completed a
private placement of $29,500,000 of Notes through the Partnership, a special
purpose affiliate of the Company. The Company owns, directly or indirectly, all
of the interests in the Partnership. In connection with the private placement,
the Notes received a "AA" rating from Duff & Phelps Credit Rating Co.

The Company was organized as a Texas real estate investment trust in June
1993 and has elected to be taxed as a REIT under the Code. The Company's
principal office is located at 17290 Preston Road, Third Floor, Dallas, Texas
75252 and its telephone number is (214) 380-0044.

13
<PAGE> 16

USE OF PROCEEDS

Based upon an assumed offering price of $16.125 per share, the net proceeds
to the Company from the Offering (after deducting estimated offering expenses)
are estimated to be approximately $31.1 million ($35.7 million if the
Underwriters' over-allotment option is exercised in full). Substantially all of
the net proceeds of the Offering will initially be invested in interest bearing
accounts and short-term interest bearing securities. As rapidly as practicable
thereafter, the net proceeds of the Offering will be used to make loans in
accordance with the Company's lending criteria.

PRICE RANGE OF COMMON SHARES

The Common Shares have been traded on the American Stock Exchange under the
symbol "PCC" since February 1995 and before that on the Nasdaq National Market
under the symbol "PMCTS" since December 17, 1993 (the date the Common Shares
first began trading on Nasdaq National Market). As of May 31, 1996, there were
459 holders of record of Common Shares. The following table sets forth for the
periods indicated the high and low sales prices as reported on the American
Stock Exchange and the Nasdaq National Market and the dividends declared by the
Company per share for each such period.

<TABLE>
<CAPTION>
REGULAR SPECIAL
DIVIDENDS DIVIDENDS
QUARTER ENDED HIGH LOW PER SHARE PER SHARE
----------------------------------------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C>
March 31, 1994................................. $15.25 $13.50 $ 0.240 --
June 30, 1994.................................. $15.38 $13.25 $ 0.240 --
September 30, 1994............................. $15.00 $13.50 $ 0.240 --
December 31, 1994.............................. $14.25 $11.25 $ 0.280 $0.02
March 31, 1995................................. $14.00 $11.75 $ 0.300 --
June 30, 1995.................................. $15.13 $12.25 $ 0.315 --
September 30, 1995............................. $15.13 $13.75 $ 0.330 --
December 31, 1995.............................. $17.13 $13.88 $ 0.355 $0.08
March 31, 1996................................. $17.88 $15.75 $ 0.370 --
June 30, 1996 (through June 17, 1996).......... $17.38 $15.50 $ 0.380 --
</TABLE>

14
<PAGE> 17

DIVIDENDS AND DISTRIBUTIONS POLICY

GENERAL

The Company distributes to its shareholders substantially all of its net
investment income and realized net capital gains, if any, as determined for
income tax purposes. Dividends are paid by the Company at the discretion of the
trust managers and depend on the actual cash flow of the Company, its financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Code (see "Federal Income Tax Considerations") and such
other factors as the trust managers may deem relevant. Applicable law may limit
the amount of dividends and other distributions payable by the Company. At each
meeting in any fiscal year for the purpose of declaring dividends, the trust
managers declare a dividend of net investment income at a quarterly rate based
on an estimate of the year's net investment income. A special dividend is also
generally declared prior to the end of December, for distribution during the
following January, to shareholders of record as of the last business day of the
year, in at least the minimum amount required to comply with the Code's
provisions regarding the distribution of the year's distributable net investment
income and net realized capital gains.

Dividends are paid based on taxable income and, accordingly, may be greater
or less than book income. If the Company is unable to distribute amounts
sufficient to satisfy the requirements under the Code relating to its status as
a REIT, the Company could incur liability for taxes and possibly lose its status
as a REIT. See "Federal Income Tax Considerations." In the event that amounts
distributed exceed the earnings and profits of the Company available for
distribution, such excess will be considered a tax free return of capital to a
shareholder to the extent of the shareholder's adjusted basis in his Common
Shares and as capital gain to the extent the distributions exceed both available
earnings and profits and stock basis.

On May 23, 1996, the Company declared a quarterly dividend of $0.38 per
Common Share payable on July 15, 1996 to holders of record as of June 28, 1996.
Purchasers of Common Shares in this Offering will not be entitled to receive
such dividend. For information relating to the frequency and amounts of
dividends paid on the Common Shares, see "Price Range of Common Shares."

DIVIDEND REINVESTMENT PLAN

Pursuant to the Company's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose Common Shares are registered in his own name may elect to have
all distributions reinvested automatically in additional Common Shares by
contacting the American Stock Transfer and Trust Company (the "Plan Agent"). The
Company may place limitations on participation in the Plan to assure the
maintenance of its REIT status. See "Federal Income Tax Considerations."
Shareholders whose Common Shares are held in the name of a nominee may have
distributions reinvested automatically by the nominee in additional Common
Shares under the Plan, but only to the extent the nominee participates on his
behalf. Shareholders whose Common Shares are held in the name of a nominee
should contact the nominee for details. All distributions to investors who do
not participate (or whose nominee does not participate) in the Plan will be paid
by check mailed directly to the record holder by or under the direction of the
Plan Agent.

The Plan Agent will promptly apply a Plan participant's dividends or
distributions to the purchase of newly issued Common Shares from the Company.
The purchase price of Common Shares purchased from the Company will be 98% of
the average of the closing sales prices, as reported in The Wall Street Journal,
at which Common Shares were traded on the last five days on which trading in the
Common Shares is reported to have taken place on the American Stock Exchange
prior to the payment date of the dividend or distribution. The number of Common
Shares to be received by the Plan participants on account of the dividend or
distribution will be calculated on the basis of the initially determined market
price and will be credited to their accounts as of the payment date of the
dividend or distribution.

The Plan Agent will maintain all shareholder accounts in the Plan and will
furnish written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Certificates
for the shares will be retained by the Plan Agent and available upon 20 days'
notice. Because of the length of such notice period, it may take longer for a
shareholder to liquidate Common Shares held under

15
<PAGE> 18

the Plan than Common Shares held outside the Plan. There will be no charge to
participants for reinvesting dividends and capital gains distributions.

The Plan also permits participants to purchase Common Shares thereunder by
making cash payments to the Plan Agent in amounts of not less than $50 or more
than $10,000 per month. These optional cash payments will be applied to acquire
Common Shares from the Company on the same terms as the reinvestment of
dividends.

The automatic reinvestment of distributions will not relieve participants
of any income tax which may be payable on distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan on at
least 90 days' written notice to participants in the Plan. The Company may also
amend or terminate the Plan without notice if necessary to preserve the
Company's REIT status.

The Company has reserved 400,000 Common Shares for issuance pursuant to the
Plan. All Common Shares acquired under the Plan will be originally issued by the
Company, and a written prospectus relating to such Common Shares may be obtained
from the Company or the Plan Agent.

16
<PAGE> 19

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and of the Company and its subsidiaries on a pro forma basis to
give effect to the 2,000,000 Common Shares offered hereby at an assumed offering
price of $16.125 per share and the 60,000 Common Shares in the Direct Offering
at an assumed offering price of $16.125 per share net of Underwriting Discount.
This table should be read in conjunction with the Financial Statements and the
related notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------
ACTUAL PRO FORMA
------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Short-term debt......................................................... $ -- $ --
======= =========
Long-term debt.......................................................... $ -- $ --
Fixed rate loan backed notes............................................ 29,500 29,500
Beneficiaries' equity:
Common Shares, $.01 par value; 100,000,000 shares authorized;
3,540,988 and 5,600,988(1) outstanding, respectively............... 35 56
Additional paid-in capital.............................................. 49,110 80,179
Cumulative net income................................................... 9,456 9,456
Cumulative dividends.................................................... (9,600) (9,600)
------- ---------
Total beneficiaries' equity............................................. 49,001 80,091
------- ---------
Total capitalization.................................................. $78,501 $ 109,591
======= =========
</TABLE>

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

(1) Does not include up to 300,000 shares reserved for issuance upon exercise of
the Underwriters' over-allotment option. See "Underwriting."

17
<PAGE> 20

SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company as of
and for the period from June 4, 1993 (date of inception) to December 31, 1993,
for the years ended December 31, 1994 and December 31, 1995 and for the three
months ended March 31, 1995 and March 31, 1996. The following data should be
read in conjunction with the financial statements of the Company and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The selected
financial data presented below for the period from June 4, 1993 (date of
inception) to December 31, 1993 and the years ended December 31, 1994 and 1995
has been derived from the financial statements of the Company audited by Coopers
& Lybrand L.L.P., independent public accountants, whose report with respect
thereto is included elsewhere in this Prospectus. The selected financial data
presented below for the three months ended March 31, 1995 and 1996 has been
derived from unaudited financial statements.

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993 YEARS ENDED THREE MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1993 1994 1995 1995 1996
------------------- ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans............. $ 3 $2,289 $5,610 $1,107 $1,795
Interest and dividends -- other
investments.................... $ 13 $1,222 $ 325 $ 230 $ 54
Other income...................... $ -- $ 180 $ 295 $ 84 $ 57
Total revenues.................... $ 16 $3,691 $6,230 $1,421 $1,906
Expenses:
Advisory and servicing fees,
net............................ $ --(3) $ 357 $ 946 $ 161 $ 276
Interest.......................... $ -- $ 37 $ 221 $ 16 $ 252
Other............................. $ 1 $ 97 $ 167 $ 59 $ 34
Total expenses.................... $ 1 $ 491 $1,334 $ 236 $ 562
Net income.......................... $ 15 $3,200 $4,896 $1,185 $1,344
Weighted average common shares
outstanding....................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
Net income per common share......... $0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
Dividends per common share.......... $ --(3) $ 1.02 $ 1.38 $ 0.30 $ 0.37
Return on average assets(1)......... --(3) 6.5% 8.8% 9.1%(5) 7.5%(4)(5)
Return on average common
beneficiaries' equity(2).......... --(3) 6.9% 10.2% 10.0%(5) 11.1%(5)
</TABLE>

<TABLE>
<CAPTION>
AT END OF PERIOD
-----------------------------------------------
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable................................... $ 3,119 $32,694 $59,130 $62,958
Total assets....................................... $43,153 $51,785 $59,797 $83,165
Notes payable...................................... $ -- $ -- $ 7,920 $29,500
Beneficiaries' equity.............................. $42,941 $47,440 $48,183 $49,001
Total liabilities and
beneficiaries' equity............................ $43,153 $51,785 $59,797 $83,165
</TABLE>

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

(1) Based on the Average Annual Value of All Assets. See "Glossary."

(3) Not applicable due to initial period of the Company's operations which
commenced on December 28, 1993.

(4) The decrease was primarily caused by the private placement of the Notes on
March 12, 1996.

(5) Percentages annualized.

18
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company was incorporated in June 1993 and had no operations prior to
completion of its initial public offering (the "IPO") on December 28, 1993.
Accordingly, there are no comparable 1993 results to the year ended December 31,
1994. The net proceeds to the Company from the IPO were $47,738,828, including
the over-allotment option with respect thereto.

During the three months ended March 31, 1996, the Company originated and
funded $4.8 million of loans, all to businesses operating in the lodging
industry. During the year ended December 31, 1995, the Company originated and
funded $31.7 million of loans, all to businesses operating in the lodging
industry. During the year ended December 31, 1994, the Company originated and
funded or purchased loans with a face value of $35.2 million. Of these loans,
approximately $32.5 million, or 92%, were to corporations and individuals
operating in the lodging industry. As of March 31, 1996, the total portfolio
outstanding was $64.0 million ($62.9 million after reductions for loans
purchased at a discount and deferred commitment fees) with a weighted average
contractual interest rate of approximately 11.2%. The weighted average
contractual interest rate does not include the effects of the amortization of
discount on purchased loans or commitment fees on funded loans. Loans are
collateralized primarily by first liens on real estate acquired and are
guaranteed, for all but one loan, by the principals of the businesses financed.
Included in the funded loans are $1.8 million which have been advanced pursuant
to the SBA 504 program. See "Business -- SBA Section 504 Program." Interest
rates charged on such advances are comparable to those which are customarily
charged by the Company.

CERTAIN ACCOUNTING CONSIDERATIONS

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

The Company follows the accounting practices prescribed by the American
Institute of Certified Public Accountants-Accounting Standards Division in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loan loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. To date, no
loan loss reserves have been established. The determination of whether
significant doubt exists and whether a loan loss provision is necessary for each
loan requires judgment and considers the facts and circumstances existing on the
evaluation date. Changes to the facts and circumstances of the borrower, the
lodging industry and the economy may result in the establishment of significant
loan loss reserves. At such time as a determination is made that there exists
significant doubt as to the ultimate realization of a loan, the effect on
operating results may be material.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1995 Compared to the Three Months Ended March 31,
1996

The net income of the Company for the three months ended March 31, 1995 and
1996 was $1.185 million and $1.344 million, or $0.34 and $0.38 per share,
respectively.

Interest income -- loans increased by $689,000, or 62%, from $1.107 million
for the three months ended March 31, 1995 to $1.796 million for the three months
ended March 31, 1996. This increase was primarily attributable to: (i) the
reallocation of the Company's initial investment of the proceeds of the IPO in
cash equivalents and U.S. Government securities to higher-yielding loans to
small businesses, and (ii) portfolio

19
<PAGE> 22

growth from the proceeds of borrowing arrangements. The average invested assets
in loans to small businesses increased by $24.8 million, or 69%, from $36.2
million during the three months ended March 31, 1995, to $61.0 million during
the three months ended March 31, 1996. The annualized average yields on loans
for the three months ended March 31, 1996 and 1995 were approximately 12.1% and
13.1%, respectively. Interest income -- loans includes interest earned on loans,
the accretion of discount on purchased loans (approximately $7,000 and $6,000
during the three months ended March 31, 1996 and 1995, respectively) and the
accretion of deferred commitment fees (approximately $51,000 and $56,000 during
the three months ended March 31, 1996 and 1995, respectively).

Interest and dividends -- other investments decreased by $177,000, or 77%,
from $231,000 during the three months ended March 31, 1995 to $54,000 during the
three months ended March 31, 1996. This decrease was due to the reduction in
funds available for short-term investments as the Company continued to invest
proceeds from the IPO. The proceeds from the IPO were initially invested in
government securities and money market funds until small business loans were
identified and funded. The average outstanding short-term investments of the
Company decreased by $6.8 million, 44%, from $15.3 million during the three
months ended March 31, 1995 to $8.5 million during the three months ended March
31, 1996. The Company had no material short-term investments outstanding during
the quarter ended March 31, 1996 until the completion of the structured
financing in mid-March (see Note 10 to the consolidated financial statements).
The average yields on short-term investments during the three months ended March
31, 1996 and 1995 were approximately 5.6% and 5.8%, respectively.

Other income decreased by $27,000, or 32%, from $84,000 during the three
months ended March 31, 1995 to $57,000 during the three months ended March 31,
1996. Other income consists of: (i) amortization of construction monitoring
fees, (ii) prepayment penalties, (iii) late fees and other loan fees, and (iv)
other miscellaneous collections. The decrease was primarily due to the
prepayment fees collected on a loan during the three months ended March 31, 1995
of $51,000. The decrease was offset by income recognized from the monitoring of
construction hotel/motel projects in process which increased by $7,000 from
$32,000 during the three months ended March 31, 1995 to $39,000 during the three
months ended March 31, 1996.

Expenses consisted primarily of the servicing and advisory fees paid to the
Investment Manager. For additional discussion relating to the components of the
servicing and advisory fees, see "Investment Manager -- Investment Management
Agreement." The operating expenses borne by the Investment Manager include any
compensation to the Company's officers (other than stock options) and the cost
of office space, equipment and other personnel required for the Company's
day-to-day operations. The expenses paid by the Company include transaction
costs incident to the acquisition and disposition of investments, regular legal
and auditing fees and expenses, the fees and expenses of the Company's
Independent Trust Managers, the costs of printing and mailing proxies and
reports to shareholders and the fees and expenses of the Company's custodian and
transfer agent, if any. The Company, rather than the Investment Manager, will
also be required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses. Pursuant to the Investment Management
Agreement, the Company incurred an aggregate of $356,000 in management fees for
the three months ended March 31, 1996. Of the total management fees paid or
payable to the Investment Manager during the three months ended March 31, 1996,
$80,000 has been netted against commitment fees as a direct cost of originating
loans. Investment management fees were $240,000 for the three months ended March
31, 1995. Of the total management fees paid or payable to the Investment Manager
during the three months ended March 31, 1995, $80,000 was netted against
commitment fees as a direct cost of originating loans. The increase in
investment management fees of $116,000 (prior to netting direct costs of
originating loans), or 48%, is primarily due to the average outstanding invested
assets increasing from $35.2 million during the three months ended March 31,
1995 to $60.6 million during the three months ended March 31, 1996 (a $25.4
million increase, or 72%) and average total assets increasing from $51.4 million
during the three months ended March 31, 1995 to $66.2 million during the three
months ended March 31, 1996 (a $15.0 million increase, or 29%).

Legal and accounting fees decreased by $17,000, or 65%, from $26,000 during
the three months ended March 31, 1995, to $9,000 during the three months ended
March 31, 1996. This decrease is attributable to billing of accounting and
corporate legal fees during the three months ended March 31, 1995.

20
<PAGE> 23

General and administrative expenses decreased by $8,000, or 24%, from
$33,000 during the three months ended March 31, 1995 to $25,000 during the three
months ended March 31, 1996. This decrease is primarily attributable to the cost
of printing and mailing the Company's dividend reinvestment plan and the cost of
listing of the Company's common shares of beneficial interest on the American
Stock Exchange during the three months ended March 31, 1995.

Interest expense of $252,000 relates to interest and non-utilization
charges on the Company's revolving credit facility (approximately $136,000),
interest on the structured financing (approximately $105,000) and interest
incurred on borrower advances (approximately $11,000) during the three months
ended March 31, 1996. The obligation to pay interest on borrower advances is
included in borrower advances on the accompanying balance sheet. The Company did
not have any outstanding borrowings during the three months ended March 31,
1995. Interest on borrower advances was $16,000 during the three months ended
March 31, 1995.

Year Ended December 31, 1994 Compared to the Year Ended December 31, 1995

The net income of the Company for the years ended December 31, 1994 and
1995 was $3.2 million and $4.9 million, or $0.93 per share and $1.42 per share,
respectively.

Interest income -- loans increased by $3.3 million, or 143%, from $2.3
million for the year ended December 31, 1994 to $5.6 million for the year ended
December 31, 1995. This increase was primarily attributable to the reallocation
of the Company's initial investment of the proceeds of the IPO from cash and
U.S. Government securities to higher-yielding loans to small businesses. The
average invested assets increased by $27.9 million, or 148%, from $18.9 million
during the year ended December 31, 1994 to $46.8 million during the year ended
December 31, 1995. The average yields on loans for the years ended December 31,
1995 and 1994 were approximately 12.1% and 13.2%, respectively. Interest
income -- loans includes interest earned on loans, the accretion of discount on
purchased loans (approximately $26,000 and $22,000 during the years ended
December 31, 1995 and 1994, respectively) and the accretion of deferred
commitment fees (approximately $197,000 and $166,000 during the years ended
December 31, 1995 and 1994, respectively).

Interest and dividends -- other investments decreased by $875,000, or 73%,
from $1.2 million during the year ended December 31, 1994 to $325,000 during the
year ended December 31, 1995. This decrease was due to the reduction in funds
available for short-term investments as the Company began making loans from the
proceeds of the IPO. The proceeds from the IPO were initially invested in
government securities and money market funds until Primary Investments were
identified and funded. The average short-term investments of the Company
decreased by $25.2 million, or 81%, from $31.2 million during the year ended
December 31, 1994 to $6.0 million during the year ended December 31, 1995. The
average yields on short-term investments during the years ended December 31,
1995 and 1994 were approximately 5.5% and 3.9%, respectively.

Other income increased by $115,000, or 64%, from $180,000 during the year
ended December 31, 1994 to $295,000 during the year ended December 31, 1995.
Other income consists of: (i) amortization of construction monitoring fees, (ii)
prepayment penalties, (iii) late fees and other loan fees, and (iv) other
miscellaneous collections. The increase was primarily due to construction
hotel/motel projects in process increasing causing an increase of $111,000 in
construction monitoring fees recognized as income from $35,000 during the year
ended December 31, 1994 to $146,000 during the year ended December 31, 1995.

Expenses consisted primarily of the servicing and advisory fees paid to PMC
Advisers. For additional discussion relating to the components of the servicing
and advisory fees, see "Investment Manager -- Investment Management Agreement."
The operating expenses borne by the Investment Manager, none of which is
allocated to the Company, include any compensation to the Company's officers
(other than stock options) and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses paid by
the Company include transaction costs incident to the acquisition and
disposition of investments, regular legal and auditing fees and expenses, the
fees and expenses of the Company's Independent Trust Managers, the costs of
printing and mailing proxies and reports to shareholders and the fees and
expenses of the Company's custodian and transfer agent, if any. The Company,
rather than the Investment Manager, will also be required to pay expenses
associated with any litigation and other

21
<PAGE> 24

extraordinary or nonrecurring expenses. Pursuant to the Investment Management
Agreement, the Company incurred an aggregate of $1,189,000 in management fees
for the year ended December 31, 1995. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1995,
$244,000 has been netted against commitment fees as a direct cost of originating
loans. Investment management fees were $429,000 for the year ended December 31,
1994. No advisory fees for the six month period ended June 30, 1994 were due to
the Investment Manager. Of the advisory and servicing fees paid or payable to
the Investment Manager during the year ended December 31, 1994, $71,500 was
netted against commitment fees as a direct cost of originating loans. The
increase in investment management fees of $760,000 (prior to netting direct
costs of originating loans), or 177%, is primarily due to the increase in the
average invested assets increasing from $18.9 million to $46.8 million and
average total assets increasing from $49.0 million to $53.9 million.

Legal and accounting fees increased by $38,000, or 115%, from $33,000
during the year ended December 31, 1994 to $71,000 during the year ended
December 31, 1995. This increase is attributable to higher accounting expenses
and corporate legal fees attributed to the increased corporate activity.

General and administrative expenses increased by $32,000, or 50%, from
$64,000 during the year ended December 31, 1994 to $96,000 during the year ended
December 31, 1995. This increase is primarily attributable to (i) shareholder
servicing fees incurred during the year ended December 31, 1995 for dividend
payments, (ii) the cost of printing and mailing the Company's dividend
reinvestment plan and annual reports, and (iii) the cost of listing the Common
Shares on the American Stock Exchange.

Interest expense of $222,000 relates to interest and non-utilization
charges on the revolving credit facility (approximately $171,000) and interest
incurred on borrower advances (approximately $51,000) during the year ended
December 31, 1995. The interest payable at December 31, 1995, of $56,267
pertained to interest incurred on the outstanding balance of the revolving
credit facility. The obligation to pay interest on borrower advances is included
in borrower advances on the accompanying balance sheet.

As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.

CASH FLOW ANALYSIS

The Company generated $3.8 million and $6.6 million from operating
activities during the years ended December 31, 1995 and 1994, respectively. The
decrease of $2.8 million, or 42%, was primarily due to fluctuations in borrowers
advances (decreased $4.1 million from a source of $2.3 in 1994 to a use of $1.8
million in 1995). During 1994, as many construction projects were in the initial
stages, the borrowers were required to submit their required advances. Since
1994 was the first full year of operations, there was no reimbursement activity
for prior years advances and consequently 1994 had a significant positive cash
flow from borrower advances. During 1995, many of the construction projects were
significantly completed, with the result being a net reduction in outstanding
borrower advances at December 31, 1995. See "Business -- Borrower Advances." Net
income increased $1.7 million, or 53%, from $3.2 million during the year ended
December 31, 1994 to $4.9 million during the year ended December 31, 1995. Cash
used for advances to affiliates increased by $500,000, from $160,000 at December
31, 1994 to $660,000 at December 31, 1995. The increase was a result of the
annual fee payable pursuant to the Investment Management Agreement increasing in
1995 due to the larger base of invested assets and achieving the target to earn
the full incentive fee, with such fee payable in 1996.

The Company used $26.7 million and $25.1 million through investing
activities during the years ended December 31, 1995 and 1994, respectively. As
lending is the Company's primary source of business, loans funded/purchased is
the main reason for these uses. Loans funded/purchased were $31.7 million during
the year ended December 31, 1995 as compared to $35.0 million for the year ended
December 31, 1994, a 9% decrease. This decrease was due to the amount of
construction projects in process during 1995, whereas these projects utilize the
Company's funds available for commitment, the actual funding process occurs over
a period of time. During 1994, most of the amounts loaned related to the
acquisition or refinance of lodging properties.

22
<PAGE> 25

The Company generated $4.3 million and $2.3 million from financing
activities during the years ended December 31, 1995 and 1994, respectively.
During 1994, the main source of funds was $5.2 million received from the
exercise of the over-allotment option in connection with the IPO. During 1995,
the main source of funds was $7.9 million of net proceeds from advances under
the Company's revolving credit facility. The Company's main use of funds from
financing activities is the payment of dividends as a part of its requirements
to maintain REIT status. Dividends paid increased from $2.5 million during the
year ended December 31, 1994 to $4.3 million during the year ended December 31,
1995. This increase of $1.8 million corresponds to the Company's increase in net
income.

LIQUIDITY AND CAPITAL RESOURCES

The primary use of the Company's funds is to originate loans and, from time
to time, to acquire loans from certain governmental agencies and/or their
agents. The Company also uses funds for payment of dividends to shareholders,
management and advisory fees (in lieu of salaries and other administrative
overhead), general corporate overhead and interest and principal payments on
borrowed funds.

At March 31, 1996, the Company had approximately $17.0 million of cash and
cash equivalents and approximately $35.7 million in outstanding commitments to
originate loans. Such commitments were made in the ordinary course of the
Company's business. These commitments to extend credit are conditioned upon
compliance with the terms of the commitment letter. Commitments have fixed
expiration dates and require payment of a fee. Since some commitments expire
without the proposed loan closing, the total committed amounts do not
necessarily represent future cash requirements. In general, to meet its
liquidity requirements, including expansion of its outstanding loan portfolio,
the Company intends to use: (i) its short-term revolving credit facility
described below, (ii) placement of long-term borrowings, (iii) issuance of debt
securities, and/or (iv) offering of additional equity securities, including the
Offering. Pursuant to the Investment Management Agreement, if the Company does
not have available capital to fund outstanding commitments, the Investment
Manager will refer such commitments to affiliates of the Company. The ability of
the Company to meet its liquidity needs will depend on its ability to borrow
funds or issue equity securities on favorable terms.

By December 31, 1995, the Company had fully utilized the proceeds from the
IPO. During 1995, the Company completed an arrangement for a revolving credit
facility providing the Company with funds to originate loans collateralized by
commercial real estate. This credit facility provides the Company up to the
lesser of $20 million or an amount equal to 50% of the value of the underlying
property collateralizing the borrowings. At March 31, 1996, the Company had no
outstanding borrowings under the credit facility and $20 million available
thereunder. The Company is charged interest on the balance outstanding under the
credit facility at the Company's election of either the prime rate of the lender
less 50 basis points or 200 basis points over the 30, 60 or 90 day LIBOR.
Additional funds will be available to the Company from the proceeds of the
dividend reinvestment plan or SBA 504 loan takeouts. Management anticipates
these sources of funds will be adequate to meet its existing obligations.

On March 12, 1996, a special purpose affiliate of the Company, PMC
Commercial Receivable Limited Partnership, a Delaware limited partnership (the
"Partnership"), completed a private placement (the "Private Placement") of
$29,500,000 of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes").
The Company owns, directly or indirectly, all of the partnership interests of
the Partnership. The Notes, which were issued at par, mature in 2016 and bear
interest at the rate of 6.72% per annum and are secured by approximately $39.7
million of loans contributed by the Company to the Partnership, of which the
Company owns a 99% limited partnership interest. The loans were originated or
purchased by the Company in accordance with the Company's lending strategy and
underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to the
Company or its assets in the event of nonpayment, other than the mortgage loans
securing the Notes. The net proceeds from this issuance of the Notes
(approximately $27.1 million after giving effect to issuance costs of $500,000
and the establishment of a $1.9 million deposit held by the trustee as
collateral) were distributed to the Company in accordance with its partnership
interest in the Partnership. The Company used approximately $10.3 million of
such proceeds to pay down outstanding borrowings under the Company's credit
facility and

23
<PAGE> 26

intends to make additional loans in accordance with its lending criteria with
the remaining proceeds. In connection with the Private Placement, the Notes
received a "AA" rating from Duff & Phelps Credit Rating Co.

In general, if the returns on loans originated by the Company with funds
obtained from any borrowing or the issuance of any Preferred Shares fail to
cover the cost of such funds, the net cash flow on such loans will be negative.
Additionally, any increase in the interest rate earned by the Company on
investments in excess of the interest rate or dividend rate incurred on the
funds obtained from either borrowings or the issuance of Preferred Shares would
cause its net income to increase more than it would without the leverage.
Conversely, any decrease in the interest rate earned by the Company on
investments would cause net income to decline by a greater amount than it would
if the funds had not been obtained from either borrowings or the issuance of
Preferred Shares. Leverage is thus generally considered a speculative investment
technique. See "Risk Factors -- Leverage."

Loan demand has remained high for the types of loans originated by the
Company (see "Business -- Loan Commitments"). The Private Placement may not
provide the Company with sufficient capital to expand the outstanding portfolio
at historical levels. Accordingly, during the year ending December 31, 1996, the
Company may seek additional sources for financing, including the Offering. There
can be no assurance that the Company will be able to raise funds through these
financing sources. If these sources are not available, the Company will have to
fully utilize its $20 million revolving credit facility and may have to slow the
rate of increasing the outstanding loan portfolio.

RECENT ACCOUNTING PRONOUNCEMENTS

In 1992, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair
Value of Financial Instruments," to require disclosure in the body of the
financial statements or the accompanying notes regarding the fair value of
financial instruments for which it is practicable to estimate that value and the
methods and significant assumptions used. The effective date is for financial
statements issued in fiscal years ending after December 15, 1995. The Company
has incorporated the requirements of SFAS No. 107 in the accompanying financial
statements.

In 1993, FASB issued SFAS No. 114 "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures." These pronouncements are effective
for fiscal years beginning after December 15, 1994. These statements provide
income recognition criteria for loans and generally require creditors to value
certain impaired and restructured loans at the present value of the expected
future cash flows, discounted at the loan's effective interest rate, or at fair
value of the collateral if the loan is collateral dependent.

The implementation of SFAS No. 114 and SFAS No. 118 did not have an effect
on the Company's financial statements.

In 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employee" (APB No. 25) or to recognize compensation expense for
grants of stock, stock options, and other equity instruments to employees based
on fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earnings per
share as if the fair value based accounting prescribed by SFAS No. 123 has been
applied. The Company has elected to continue expense recognition pursuant to APB
No. 25. SFAS No. 123 is effective for fiscal years beginning after December 15,
1995.

24
<PAGE> 27

BUSINESS

GENERAL

The Company is a commercial lender that originates loans to small business
enterprises which are primarily collateralized by first liens on real estate.
The Company principally lends to small businesses in the lodging industry and
also targets the commercial real estate, service, retail and manufacturing
industries. The Company was formed in June 1993 as a REIT pursuant to the Texas
Real Estate Investment Trust Act (the "Texas REIT Act"). The Company's
investments are managed pursuant to the Investment Management Agreement with PMC
Advisers, a wholly-owned subsidiary of PMC Capital and an affiliate of the
Company.

Although the Company, PMC Advisers and PMC Capital are separate entities,
the management team of all three entities is the same, which provides
significant underwriting benefits to the Company. The loans funded by the
Company have many of the same characteristics as the loans typically originated
by PMC Capital and the underwriting criteria for such loans is similar to the
underwriting criteria typically required by PMC Capital (other than with respect
to loan amounts and SBA eligibility requirements). Consequently, the Company
believes that the experience of the officers of PMC Advisers in originating
loans for PMC Capital benefits the Company.

The Company also expects to continue to benefit from the established
customer base of PMC Capital, particularly those customers with a strong credit
profile. The Company benefits from the in-house referral system which is
presently in place at PMC Capital utilizing the existing marketing efforts
available through PMC Advisers. Many of the Company's existing and potential
borrowers have other projects that are currently financed by PMC Capital. These
borrowers' financing needs have grown over time and now exceed the limitations
set for SBA approved loan programs. These borrowers generally have greater
financial strength and stability than those targeted for SBA loan programs.

BUSINESS STRATEGY

The Company's principal business objective is to maximize shareholder
returns by expanding its loan portfolio while adhering to its underwriting
criteria. The Company currently has three principal strategies to achieve this
objective. First, the Company expects to continue to benefit from the
established customer base of PMC Capital due to the referral system available
through PMC Advisers. Many of the Company's existing and potential borrowers
have other projects that are currently financed by PMC Capital; however, their
borrowers' financing needs have grown over time and now exceed the limitations
set for SBA approved loan programs. See "-- SBA Regulations." In addition,
borrowers who have financial strength and stability in excess of the SBA loan
program criteria and represent continuing lending opportunities. Second, the
Company is seeking to expand its relationship with national hotel and motel
franchisors to secure a consistent flow of lending opportunities for the
Company. For example, on April 12, 1996, the Company entered into a marketing
agreement with USFS whereby USFS, through its wholly-owned subsidiary, Microtel,
will present and market to prospective Microtel franchisees the Company's
current financing programs. All fees payable to USFS pursuant to the marketing
agreement will be paid by the Investment Manager, and the Company will have no
obligation with respect thereto. The third principal strategy of the Company is
to continue to obtain cost-effective financing to maximize its growth. On March
12, 1996, the Company completed a private placement of $29,500,000 of Notes
through the Partnership, a special purpose affiliate of the Company. The Company
owns, directly or indirectly, all of the interests in the Partnership. In
connection with the private placement, the Notes received a "AA" rating from
Duff & Phelps Credit Rating Co.

UNDERWRITING CRITERIA AND LOAN ORIGINATIONS

Underwriting Criteria. The Company primarily originates loans to small
businesses that (i) exceed the net worth, asset, income, number of employees or
other limitations applicable to the SBA programs utilized by PMC Capital, (ii)
require funds in excess of $1.1 million without regard to SBA eligibility
requirements, or (iii) require funds which PMC Capital does not have available
and which otherwise meet the Company's underwriting criteria. Such loans
("Primary Investments") are primarily collateralized by first liens on real

25
<PAGE> 28

estate of the related business, personally guaranteed by the principals of the
entities obligated on the loans and are subject to the Company's underwriting
criteria.

The underwriting criteria applied by the Company to evaluate prospective
borrowers generally requires such borrowers to (i) provide first-lien real
estate mortgages not exceeding 70% of the lesser of appraised value or cost,
(ii) provide proven management capabilities, (iii) meet certain criteria with
respect to historical or projected debt coverage, and (iv) have principals with
satisfactory credit histories and provide personal guarantees, as applicable.

Pursuant to management's policies, at least 75% of the Company's assets
must be utilized to fund the Primary Investments. Through March 31, 1996, the
Company had utilized 98% of its invested assets to fund the Primary Investments.
In addition, the Company may utilize a maximum of 25% of its assets to (i)
purchase from certain governmental agencies and other sellers, loans on which
payments are current at the time of the Company's commitment to purchase such
loans and which meet the Company's underwriting criteria, (ii) invest in other
commercial loans secured by real estate, and (iii) invest in real estate,
provided such investments do not affect the ability of the Company to maintain
its qualification as a REIT under the Code. Management of the Company has broad
discretion in evaluating and pursuing investment opportunities.

Loan Originations. As of March 31, 1996, 96% of the Primary Investments
have been to small business owners in the lodging industry. In addition, the
Company may lend to small business owners in the commercial real estate,
service, retail and manufacturing industries. The Company operates from the
existing offices of the Investment Manager in Texas, Florida and Georgia and
management anticipates that the Company will conduct operations from any future
office of the Investment Manager. The Investment Manager receives loan referrals
from PMC Capital and solicits loan applications on behalf of the Company from
borrowers through personal contacts, attendance at trade shows, meetings and
correspondence with local chambers of commerce, direct mailings, advertisements
in trade publications and other marketing methods. The Company is not
responsible for any compensation to PMC Capital for referrals. In addition, the
Company receives a significant percentage of loans generated through referrals
from lawyers, accountants, real estate brokers, loan brokers and existing
borrowers. In some instances, the Company may make payments to non-affiliated
individuals who assist in generating loan applications, with such payments
generally not exceeding 1% of the principal amount of the loan. Through March
31, 1996, the Company had not made or committed to any such payment.

The Investment Manager, PMC Capital and the Company have entered into the
Loan Origination Agreement to address conflicts of interest regarding the loan
origination function. The Loan Origination Agreement generally requires that
loans which meet the Company's underwriting criteria be funded by the Company
provided that funds are available. In such event, loans generally will not be
made by PMC Capital other than: (i) loans in an original principal amount not
exceeding $1.1 million which qualify for the SBA Section 7(a) or SBIC loan
programs utilized by its subsidiaries and (ii) bridge loans to be refinanced by
SBA Section 7(a) upon approval of the SBA loan application. Generally, the
Company originates loans to borrowers who exceed one or more of the limitations
applicable to the SBA Section 7(a) and SBIC loan programs utilized by PMC
Capital's subsidiaries. See "-- SBA Regulations." The Company will not originate
loans in principal amounts less than $1.1 million which qualify for SBA Section
7(a) or SBIC loan programs unless PMC Capital is unable to originate such loans
because of insufficient available capital.

All prospective Primary Investments are considered by the Investment
Manager for investment by the Company. In the event that the Company does not
have funds available, origination opportunities presented to the Company may be
originated by PMC Capital or its subsidiaries.

Upon receipt of a completed loan application, the Investment Manager's
credit department (which is also the credit department of PMC Capital) conducts
an analysis of the loan which may include either a third-party appraisal or
valuation by the Investment Manager of the property collateralizing the loan to
assure compliance with loan-to-value ratios, a site inspection generally by a
member of senior management of the Investment Manager, a review of the
borrower's business experience and credit history and an analysis of debt
service coverage and debt-to-equity ratios.

26
<PAGE> 29

The Investment Manager's loan committee (which is also the loan committee
of PMC Capital), which is comprised of members of the Company's senior
management, makes a determination with respect to each loan application. The
Investment Manager's loan committee generally meets on a daily basis and either
approves the loan application as submitted, approves the loan application
subject to additional conditions or rejects the loan application. After a loan
is approved, the credit department will prepare and submit to the borrower a
good faith estimate and cost sheet detailing the anticipated costs of the
financing. The closing department reviews the loan file and assigns the loan to
the Company's counsel, the fees of whom are paid by the borrower. Prior to any
funding of a loan, the closing department is provided with the loan
documentation from the closing attorney which is reviewed prior to authorizing
disbursement.

After a loan is closed, the Investment Manager's servicing department
(which is also the servicing department of PMC Capital) is responsible on an
ongoing basis for: (i) obtaining all financial information required by the loan
documents, (ii) verifying that adequate insurance remains in effect, (iii)
refiling Uniform Commercial Code financing statements evidencing the loan, if
required, (iv) collecting and applying loan payments, and (v) monitoring
delinquent accounts.

LOAN PORTFOLIO CHARACTERISTICS

As a result of the application of the Company's underwriting criteria, the
Company's loan portfolio has the following characteristics:

(i) All loans used by borrowers to acquire real estate and/or construct
improvements thereon (the "Real Estate Loans") are secured by first
liens on business real property. Each of the related loans used to
acquire furniture, fixtures and equipment for certain of such real
estate (the "FFE Loans") is secured by a first lien on the furniture,
fixtures and equipment acquired with the proceeds of such loan and by
a second lien on the real property of the borrower under the related
Real Estate Loans. Other additional properties of certain borrowers
or guarantors have been used as additional collateral in some
instances.

(ii) All originated loans are guaranteed by the principal(s) of the
borrowers.

(iii) The loan amounts of Real Estate Loans (together with related FFE
Loans) are generally equal to or less than 70% of the fair value or
cost of the primary collateral. When necessary, credit enhancements,
such as additional collateral, are obtained to assure a maximum of
70% loan to value ratio.

The Company's loan portfolio also has the following characteristics:

a. At March 31, 1996, the Company had 66 loans outstanding with an
aggregate principal amount outstanding of $64,048,000.

b. At March 31, 1996, all loans were paying as agreed, and none of the
loans was 30 days or more delinquent.

c. Borrowers are principally involved in the lodging industry (96% as of
March 31, 1996). The remainder of the loan portfolio is comprised of
two loans in the commercial office rental market.

d. The Company has not loaned more than 10% of its assets to any single
borrower.

e. At March 31, 1996, the outstanding principal amounts of the Real
Estate Loans ranged from approximately $300,000 to $2.5 million and
the outstanding principal amounts of FFE Loans ranged from
approximately $57,000 to $312,000.

f. All originated loans provide for interest payments at fixed rates.

g. All originated loans, other than loans made under the SBA Section 504
program (the "Program"), have original maturities ranging from five to
20 years which may be extended, subject to certain conditions, by
mutual agreement of the Company and the borrower until the loan is
fully amortized if the original maturity date of the loan is prior
to the stated maturity.

27
<PAGE> 30

h. Originated loans, other than Program loans, provide for scheduled
amortization (ranging from six to 20 years). Substantially all Real
Estate Loans have balloon payment requirements (which may be extended
at maturity, subject to certain conditions, by mutual agreement of
the Company and the Borrower) and entitle borrowers to prepay all or
part of the principal amount, subject to a prepayment penalty.

i. At March 31, 1996, the weighted average maturity for the Company's
portfolio of loans was approximately six years.

LOAN PORTFOLIO

From June 4, 1993 (date of inception) through March 31, 1996, the Company
originated or purchased 76 loans in an aggregate principal amount of
approximately $75 million. The weighted average interest rate for the Company's
portfolio of loans outstanding as of March 31, 1996 was 11.2%.

All loans are paying as agreed. From inception through March 31, 1996, the
Company experienced no loan losses and no charge-offs.

All loans originated by the Company provide for fixed interest rates. The
weighted average interest rate for loans funded in the period from commencement
of operations (December 28, 1993) to December 31, 1993, the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996 were 11.50%, 11.05%,
11.42% and 11.02%, respectively. The following table sets forth the interest
rates charged under the Company's portfolio for the loans originated for the
period from inception to December 31, 1993 and the years ended December 31, 1994
and December 31, 1995 and the three months ended March 31, 1996:

INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED
(IN THOUSANDS)

<TABLE>
<CAPTION>
INTEREST RATES
------------------------------------------------------------------------
PERIOD ORIGINATED 10.00-10.49% 10.50-10.99% 11.00-11.49% 11.50-11.99% 12.00-12.25% TOTAL
- -------------------------- ------------ ------------ ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31,
1993(1)................. $ -- $ -- $ -- $ 3,216 $ -- $ 3,216
Year ended December 31,
1994.................... -- 19,181 4,263 10,083 131 33,658
Year ended December 31,
1995.................... -- 3,562 8,469 19,459 221 31,711
Three months ended March
31, 1996................ 1,700 216 702 2,212 -- 4,830
------ -------- -------- -------- ---- -------
Total........... $1,700 $ 22,959 $ 13,434 $ 34,970 $352 $73,415
====== ======== ======== ======== ==== =======
Percentage of Portfolio... 2.3% 31.3% 18.3% 47.6% 0.5% 100.00%
====== ======== ======== ======== ==== =======
</TABLE>

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

(1) The Company commenced operations on December 28, 1993.

28
<PAGE> 31

All loans originated by the Company (other than Program loans) are
guaranteed by the principal(s) of the borrowers and have original maturities
ranging from five to 20 years, which may be extended, subject to certain
conditions, by the mutual consent of the Company and the borrower until the loan
is fully amortized. The following table sets forth the amortization terms for
the loans in the Company's portfolio as of March 31, 1996:

<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OUTSTANDING PERCENT OF
AMORTIZATION TERM OF LOANS (IN THOUSANDS) PORTFOLIO
- ---------------------------------------------------------- -------- -------------- ----------
<S> <C> <C> <C>
10 years or fewer......................................... 9 $ 2,642 4.1%
11 to 20 years............................................ 55 59,928 93.6%
21 to 30 years............................................ 2 1,478 2.3%
-- -------- -----
Total........................................... 66 $ 64,048 100.0%
== ======== =====
</TABLE>

The Company lends primarily to borrowers involved in the lodging industry.
As of March 31, 1996, 96% of the Company's loan portfolio consisted of loans for
the acquisition, renovation and construction of hotels. As of March 31, 1996,
Days Inn and Holiday Inn franchisees accounted for 20.3% and 18.5%,
respectively, of the Company's outstanding loan portfolio.

The following table sets forth a breakdown of the Company's loan portfolio
at March 31, 1996 to borrowers involved in the hotel (national franchises and
independent hotels) and commercial real estate industries:

<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
NO. OF OUTSTANDING OF
LOANS (IN THOUSANDS) PORTFOLIO
------ -------------- ----------
<S> <C> <C> <C>
Days Inn............................................ 11 $ 13,015 20.3%
Holiday Inn(1)...................................... 12 11,817 18.5%
Ramada Inn.......................................... 4 5,988 9.4%
Best Western(2)..................................... 6 5,378 8.4%
Comfort Inn(3)...................................... 7 5,133 8.0%
Hampton Inn(4)...................................... 4 4,126 6.4%
Econolodge(5)....................................... 3 3,284 5.1%
Howard Johnsons(6).................................. 3 3,283 5.1%
Quality Inn(7)...................................... 3 2,441 3.8%
Super 8............................................. 3 1,506 2.4%
Knights Inn......................................... 1 645 1.0%
Sleep Inn........................................... 1 216 0.3%
-- -------- -----
Total of Franchise Affiliates............. 58 56,832 88.7%
Independent Hotels.................................. 6 4,669 7.3%
Commercial Real Estate.............................. 2 2,547 4.0%
-- -------- -----
Total............................................... 66 $ 64,048 100.0%
== ======== =====
</TABLE>

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

(1) Represents (i) five loans originated for Holiday Inn franchises with
$5,894,776 principal outstanding which represents 9.2% of the loan
portfolio, including one FFE Loan of $180,270, and (ii) seven loans
originated for Holiday Inn Express franchisees with $5,921,899 principal
outstanding which represents 9.2% of the loan portfolio, including one FFE
Loan of $56,704.

(2) Includes one FFE Loan of $311,694.

(3) Represents (i) six loans originated for Comfort Inn franchisees with
$4,021,438 principal outstanding which represents 6.3% of the loan
portfolio, including one SBA Section 504 program loan of $517,513 and one
FFE Loan of $104,794, and (ii) one loan originated for a Comfort Inn Suite
franchisee with $1,111,358 principal outstanding which represents 1.7% of
the loan portfolio.

29
<PAGE> 32

(4) Includes one FFE Loan of $117,335.

(5) Includes one Program loan of $700,000.

(6) Includes one FFE Loan of $60,000.

(7) Includes one Program loan of $593,665.

The following table sets forth the aggregate amount of loans originated or
purchased for each quarter for the periods indicated:

LOANS ORIGINATED OR PURCHASED BY QUARTER(1)

(IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- ------
<S> <C> <C> <C>
First Quarter.......................................... $ 7,039 $ 9,328 $4,830
======
Second Quarter......................................... 13,594 11,110
Third Quarter.......................................... 6,471 4,441
Fourth Quarter......................................... 7,879 6,832
------- -------
$34,983 $31,711
======= =======
</TABLE>

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

(1) The Company commenced operations on December 28, 1993 and funded a $3.2
million loan in the period from commencement of operations through December
31, 1993.

The following table sets forth the amount of the Company's loans originated
and repaid for the period and years indicated:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993 THREE
(DATE OF MONTHS
INCEPTION) YEARS ENDED ENDED
TO DECEMBER 31, MARCH
DECEMBER 31, ------------------- 31,
1993(1) 1994 1995 1996
------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable -- beginning of
period................................. $ -- $ 3,119 $32,694 $59,130
Loans originated or purchased............ 3,216 34,983 31,711 4,830
Loan repayments(2)....................... -- (4,862) (4,992) (1,015)
Other adjustments(3)..................... (97) (546) (283) 13
------------ ------- ------- -------
Loans receivable -- end of period........ $3,119 $32,694 $59,130 $62,958
========== ======= ======= =======
</TABLE>

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

(1) The Company commenced operations on December 28, 1993.

(2) Includes the payoff on certain SBA 504 loans and prepaid loans.

(3) Includes effect of amortization of loans purchased at a discount and
commitment fees collected which are accounted for in accordance with SFAS
No. 91.

LENDING ACTIVITIES

During the years ended December 31, 1994 and 1995, and the three months
ended March 31, 1996, the Company originated loans to 38, 31 and 4 corporations,
partnerships or individuals. During the years ended December 31, 1994 and 1995
and the three months ended March 31, 1996, the Company funded approximately
$33.6, $31.7 and $4.8 million and collected commitment fees of approximately
$1.3 million, $546,000 and $262,000, respectively.

The Company purchased two loans with a face value of $1,502,005 for
$1,325,113 from certain governmental agencies during the year ended December 31,
1994. The discount of $176,892 is netted against loans receivable and is being
amortized over the remaining life of the loans. During the years ended

30
<PAGE> 33

December 31, 1994 and 1995, and the three months ended March 31, 1996,
approximately $22,000, $26,000 and $7,000, respectively, of the discount was
recognized as interest income. Subsequent to December 31, 1994, the Company has
purchased no loans.

Approximately 31% and 11% of the Company's loan portfolio as of March 31,
1996 consisted of loans to borrowers in Texas and Maryland, respectively.
Approximately 32% and 12% of the Company's loan portfolio as of December 31,
1995 consisted of loans to borrowers in Texas and Maryland, respectively. No
other state had a concentration of 10% or greater during either period. The
Company's loan portfolio was approximately 96%, concentrated in the lodging
industry at both December 31, 1995 and March 31, 1996.

When originating a loan, the Company charges a commitment fee. In
accordance with SFAS No. 91, this non-refundable fee, less direct costs
associated with the origination, is deferred and included as a reduction of the
carrying value of loans receivable. These net deferred commitment fees are being
recognized as an adjustment of yield over the life of the related loan. The
Company had $664,962, $974,971 and $968,699 in net unamortized deferred
commitment fees at December 31, 1994 and 1995, and March 31, 1996, respectively.

DELINQUENCY AND COLLECTIONS

To date, the Company has had only one loan delinquent for longer than 30
days. Such loan was current as of March 31, 1996. If a borrower fails to make a
required monthly payment, the borrower will generally be notified by mail after
ten days. If the borrower has not made full payment within ten days, a late fee
is assessed. If the borrower has not responded or made full payment within 20
days after the loan becomes delinquent, a second notification letter will be
sent. Following such notification, a collection officer will initiate telephone
contact. If the borrower has not responded or made full payment within 30 days
after the loan becomes delinquent, a third notification letter will be sent and
follow-up telephone contact will be made by the collection officer. In the event
a borrower becomes 45 days delinquent, a ten day demand letter will be sent to
the borrower requiring that the loan be brought current within ten days. After
the expiration of such ten day period, the Company may proceed with legal
action. The Company's policy with respect to loans in arrears as to interest
payments for periods in excess of 60 days is to generally discontinue the
accrual of interest income on such loans. The Company will deliver a default
notice and begin foreclosure and liquidation proceedings when it determines that
pursuit of these remedies is the most appropriate course of action. The Company
continually monitors loans for possible exposure to loss. In its analysis, the
Company reviews various factors, including the value of the collateral securing
the loan and the borrower's payment history. Based upon this analysis, a loan
loss reserve will be established on a case by case basis. Through March 31,
1996, no loan loss reserve had been established.

SBA SECTION 504 PROGRAM

The Company participates as a private lender in the Program. Participation
in the Program offers an opportunity to enhance the credit status of loans. The
Program provides assistance to small business enterprises in obtaining
subordinate long-term financing by guaranteeing debentures available through
certified development companies ("CDCs") for the purpose of acquiring land,
buildings, machinery and equipment and for modernizing, renovating or restoring
existing facilities and sites. A typical finance structure for a Program project
would include a first mortgage covering 50% of the project cost from a private
lender such as the Company, a second mortgage obtained through the Program
covering up to 40% of the project cost and a contribution of at least 10% of the
project cost by the principals of the small business enterprise being assisted.
The Company generally requires at least 15% of the equity in a project to be
contributed by the principals of the borrower as well as guarantees of the
principals. The first mortgage is not guaranteed by the SBA. Although the total
size of projects utilizing the Program guarantees are unlimited, the maximum
amount of subordinated debt in any individual project generally is $750,000 (or
$1 million for certain projects). Typical projects range in size from $500,000
to $2.5 million. A business eligible for financing pursuant to the Program must:
(i) be a for-profit corporation, partnership or proprietorship, (ii) not exceed
$6 million in net worth, and (iii) not exceed $2 million in average net income
(after Federal income taxes) for each of the previous two years. Financing
pursuant to the Program cannot be used for working capital or

31
<PAGE> 34

inventory, consolidating or repaying debt or financing a plant not located in
the U.S. or its possessions. As of March 31, 1996, the Company had $1,811,000
outstanding which is anticipated to be paid off by permanent subordinated
financing provided by the Program.

U.S. FRANCHISE SYSTEMS, INC. AGREEMENT

On April 12, 1996, the Company entered into a marketing agreement (the
"Marketing Agreement") with U.S. Franchise Systems, Inc., a Delaware corporation
("USFS"), whereby USFS, through its wholly-owned subsidiary, Microtel Inns and
Suites Franchising, Inc. ("Microtel"), will present and market to prospective
Microtel franchisees the Company's current financing programs along with other
financing options. Microtel offers franchises for the establishment and
operation of a line of economy lodging facilities known as "Microtel Inns,"
"Microtel Inns & Suites" and "Microtel Suites" (collectively referred to as the
"Microtel Inns"). The Microtel Inns are designed to appeal to the traveling
public interested in low cost accommodations and basic lodging facilities.

Under the Marketing Agreement, Microtel would refer prospective franchisees
of Microtel Inns directly to the Company as a potential lending source in
connection with the acquisition and construction of a Microtel Inn. Utilizing
its standard underwriting criteria and credit review process, the Company would
evaluate each prospective franchisee prior to originating a loan. Under the
Marketing Agreement, the Company is under no obligation to originate a loan to
prospective franchisee of Microtel. Certain senior officers of Oppenheimer &
Co., one of the Representatives of the Underwriters, are investors in USFS for
their personal accounts.

USFS will generally deposit 2% of each loan commitment made under the
Marketing Agreement with the Company into a reserve account (the "Reserve
Account"), with a minimum Reserve Account balance of $100,000, to collateralize
the payment and performance of such loans and pay losses, if any, suffered by
the Company on uncollected loans. To the extent that the reserve amount exceeds
the amount required, such excess amount would be remitted by the Company to USFS
each quarter. Under the Marketing Agreement, all fees payable to USFS will be
paid by the Investment Manager and the Company will have no obligation with
respect thereto.

OTHER INVESTMENTS

The Company has purchased from certain governmental agencies two loans
secured by first liens on real estate at a discount. The Investment Manager
selected and evaluated such loans using substantially the same underwriting
criteria applicable to originated loans. When purchasing loans from governmental
agencies, underwriting information received by the Investment Manager, such as
loan applications, financial statements, property appraisals and other loan
documentation that was developed by the original lending institution, may be
outdated. In such cases, the Investment Manager will seek to supplement this
information with additional data such as credit reports on borrowers,
geographical analysis, industry demographics, economic data and, in selected
cases, current property appraisals or site visits. Prohibitions by sellers
against contacting borrowers might limit the Investment Manager's ability to
obtain accurate current information about the borrower and the Investment
Manager may have to rely on the original underwriting information with limited
ability to verify the information. These loans are currently performing as
agreed.

While the Company has not to date done so, it may also finance real estate
investors, who are not operators of the properties financed. Such loans would be
collateralized by a lien on the real estate acquired or other real estate owned
by the borrower or its principals. The personal guaranty of one or more of the
principals will typically be obtained. The loans will generally carry a fixed
rate and have maturities of five to 20 years from the date of issuance. In some
instances, there may be earlier maturity dates or dates on which the interest
rate may be modified. Most loans will provide for scheduled monthly amortization
and have a balloon payment requirement. In addition, the Company may also
purchase real estate to hold in the Company's investment portfolio.

32
<PAGE> 35

BORROWER ADVANCES

The Company finances some projects during the construction phase. At March
31, 1996, the Company was in the process of monitoring approximately $21.6
million in total commitments for construction projects, of which $9.9 million
had been funded. As part of the monitoring process to verify that the borrower's
equity investment is utilized for its intended purpose, the Company holds a
portion of the borrower's equity investment. These funds are itemized by
category (e.g., interest, inventory, construction contingencies, etc.) and are
released by the Company only upon presentation of appropriate documentation
relating to the construction project. To the extent possible, these funds are
utilized before any related loan proceeds are disbursed. At March 31, 1996, of
the borrower advances, $1.1 million was to be disbursed on behalf of borrowers
and is included as a liability on the Company's financial statements.

LOAN COMMITMENTS

At March 31, 1996, the Company had approximately $19.2 million of loan
commitments outstanding to 15 small business concerns in the lodging industry.
The weighted average interest rate on these loan commitments at March 31, 1996
was 10.57%. In addition, the Company had approximately $8.5 million of loan
commitments outstanding on 13 partially funded construction loans and $8.0
million of loan commitments outstanding on 11 Program loans. An additional $15.2
million in commitments made by the Investment Manager had been designated for
the Company at March 31, 1996, with a weighted average interest rate of 10.64%,
subject to availability of funds. These commitments are made in the ordinary
course of the Company's business and, in management's opinion, are generally on
the same terms as those to existing borrowers. Since some commitments expire
without the proposed loan closing, the total committed amounts do not
necessarily represent future cash commitments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

TAX STATUS

The Company has elected to be taxed as a REIT under Section 856(c) of the
Code. As a REIT, the Company generally is not subject to Federal income tax to
the extent it distributes at least 95% of its REIT taxable income to
shareholders. The Company may, however, be subject to certain state and local
taxes on its income and property. REITs are subject to a number of
organizational and operational requirements under the Code. See "Federal Income
Tax Considerations."

INVESTMENT MANAGER

The investments of the Company are managed by PMC Advisers. Pursuant to the
Investment Management Agreement between the Company and PMC Advisers, the
Company is obligated to pay to the Investment Manager, quarterly in arrears, a
base fee (the "Base Fee") consisting of a quarterly servicing fee of 0.125% of
the Average Quarterly Value of All Assets, representing on an annual basis
approximately 0.50% of the Average Annual Value of All Assets, and a quarterly
advisory fee of 0.25% of the Average Quarterly Value of All Invested Assets,
representing on an annual basis approximately 1% of the Average Annual Value of
All Invested Assets. In addition, for each calendar year during which the
Company's annual Return on Average Equity Capital after deduction of the Base
Fee (the "Actual Return") exceeds 6.69%, the Company will pay to the Investment
Manager, as incentive compensation, an additional advisory fee (the "Annual
Fee") equal to the product determined by multiplying the Average Annual Value of
All Invested Assets by a percentage equal to the difference between the Actual
Return and 6.69%, up to a maximum of 1% per annum. The Annual Fee will be earned
only to the extent that the annual Return on Average Common Equity Capital after
the deduction of the Base Fee and Annual Fee is at least equal to 6.69%. All
such advisory fees will be reduced by 50% with respect to the value of Invested
Assets that exceed Common Equity Capital as a result of leverage or the issuance
of Preferred Shares. See "Investment Manager."

Pursuant to the Investment Management Agreement, the Company incurred an
aggregate of $429,000, $1,189,000 and $356,000 in management fees for the years
ended December 31, 1994 and 1995 and the three months ended March 31, 1996,
respectively. See "Investment Manager -- Investment Management Agree-

33
<PAGE> 36

ment." Of the total management fees paid or payable to the Investment Manager as
of December 31, 1994 and 1995 and the three months ended March 31, 1996,
$71,500, $244,000 and $80,000, respectively, has been netted against commitment
fees as a direct cost of originating fees. Pursuant to the Investment Management
Agreement, no advisory fees were due to the Investment Manager from inception
through June 30, 1994. See "Investment Manager."

COMPETITION

The Company believes its primary competitors are banks, financial
institutions, insurance companies and other lending companies. Additionally,
there are lending programs which have been established by national franchisors
in the lodging industry. Many of these entities may have greater financial and
larger managerial resources than the Company. The Company believes that it
competes with such entities based on: (i) the interest rates, maturities and
payment schedules offered to borrowers, (ii) the reputation, experience and
marketing ability of officers of the Investment Manager, (iii) the timely credit
analysis and decision-making processes followed by the Investment Manager and
(iv) the renewal options available to borrowers.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

Investment Policies. The Company's principal investment objective is to
obtain current income from interest payments and other related fee income on its
Invested Assets for distribution to shareholders. The Company invests in
accordance with underwriting criteria established by the trust managers with the
intention of creating a portfolio of investments while preserving the capital
base of the Company and generating income for distribution to the Company's
shareholders. The Company's investments are primarily intended to be held to
maturity. The Company's investments and plan of operation are restricted by tax
provisions applicable to REITs. These tax provisions include restrictions on the
ability to sell investments for a gain, therefore, the Company has a low
turnover rate with respect to its investments.

The Company will not purchase or otherwise acquire equity securities (other
than the acquisition of securities upon foreclosure of a security interest, if
any), and under no circumstances will the Company invest in the securities of
other issuers for the purpose of exercising control. The Company will not
underwrite securities of other issuers except to the extent that it might be
deemed an "underwriter" for securities law purposes with respect to investments
that have not been and may not be offered publicly without registration under
federal or state securities laws. The Invested Assets that the Company has
originated or acquired will generally be held to maturity; however, the Company
may, from time to time, if it determines it to be advantageous and consistent
with its status as a REIT, sell specified loans to purchasers. The Company will
not offer its own securities in exchange for property, except to the extent that
the Company may issue Common Shares, priced at not less than their market value,
in lieu of an equivalent amount of cash to purchase Invested Assets or
derivative securities where such transaction would, in the judgment of the trust
managers, be advantageous to the Company and consistent with the Company's
status as a REIT. The Company will not purchase or otherwise reacquire its
Common Shares except to the extent that it may elect to redeem Common Shares to
maintain its REIT status. The Company may, however, redeem senior securities
issued by it to the extent permitted by the terms of such senior securities. The
Company may elect to create and sell interests in real estate mortgage
investment conduits or collateralized mortgage obligations if deemed appropriate
by the Company. The Company will not acquire residual interests in real estate
mortgage investment conduits, as defined in the Code, or interests in pools of
loans offered by certain governmental agencies or other similar entities, except
that the Company may invest temporarily in mortgage pass-through certificates or
interests in mortgage pools guaranteed by the Government National Mortgage
Association, the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation or similar agencies and instrumentalities. The trust
managers, including a majority of the Independent Trust Managers, may adopt or
change any investment policy of the Company consistent with its status as a REIT
without a vote of the shareholders of the Company.

Financing Policies. The Company intends to borrow money from, and issue
debt securities to, banks, insurance companies and other lenders, and may issue
Preferred Shares in order to obtain additional funds to originate Primary
Investments and Other Investments. No assurance can be given that credit
facilities will be

34
<PAGE> 37

available to the Company on favorable terms or at all. Any such borrowing or
issuance of Preferred Shares will require the specific approval of the trust
managers, including a majority of the Independent Trust Managers. Except to the
extent of nonrecourse purchase money financing from the agencies or other
sellers of loans, the Company will not, without the approval of a majority of
its shareholders, incur a borrowing or issue Preferred Shares if as a result the
Company's total liability for money borrowed would exceed 200% of its
shareholders' equity or the total amount of borrowings and obligations in
respect of outstanding Preferred Shares would exceed 300% of common
shareholders' equity, determined as of the time of each borrowing or issuance.

Affiliate Transaction Policy. Section 4.12 of the Bylaws of the Company
provides that, except as otherwise provided by the Declaration of Trust or the
Bylaws, and in the absence of fraud, a contract, act or other transaction,
between the Company and any other person, or in which the Company is interested,
shall be valid and no trust manager or officer of the Company shall have any
liability as a result of entering into any such contract, act or transaction,
even though (i) one or more of the trust managers, directly or indirectly, is
interested in, connected with or is a trustee, partner, director, shareholder,
member, employee, officer or agent of such other person, or (ii) one or more of
the trust managers, individually or jointly with others, is a party to, or
directly or indirectly is interested in, or connected with, such contract, act
or transaction, provided that (a) such interest or connection is disclosed in
reasonable detail or known to the trust managers and thereafter the trust
managers authorize or ratify such contract, act or other transaction by
affirmative vote of a majority of the Independent Trust Managers, or (b) such
interest or connection is disclosed in reasonable detail or known to the
shareholders, and thereafter such contract, act or transaction is approved by
shareholders holding a majority of the shares then outstanding and entitled to
vote thereon.

Section 4.11 of the Bylaws provide that any trust manager or officer of the
Company may acquire, own, hold and dispose of shares of the Company for his
individual account, and may exercise all rights of a shareholder to the same
extent and in the same manner if he were not a trust manager or officer of the
Company. Any trust manager or officer of the Company may, in a capacity other
than that of trust manager or officer of the Company, have business interests
and engage in business activities similar to or in addition to those relating to
the Company which may include the acquisition, syndication, holding, management,
development, operation or disposition, for his own account or for the account of
others, of interest in mortgages, interests in real property, or interests in
persons engaged in the real estate business. Each trust manager and officer of
the Company shall be free of any obligation to present to the Company any
investment opportunity which comes to him in any capacity other than solely as
trust manager or agent of the Company, even if such opportunity is of a
character which, if presented to the Company, could be exploited by the Company.
Subject to Section 4.12 of the Bylaws discussed above, any trust manager or
officer of the Company may be a trustee, officer, director, shareholder,
partner, member, advisor or employee of, or otherwise have a direct or indirect
interest, in any person who may be engaged to render advice or services to the
Company, and may receive compensation from such person as well as compensation
as trust manager or officer or otherwise hereunder.

The Company has not adopted any polices with respect to its shareholders,
affiliates (other than trust managers and officers) or any other person (i)
having any direct or indirect pecuniary interest (a) in any investment to be
acquired or disposed of by the Company or (b) in any transactions to which the
Company is a party or has an interest, or (ii) engaging for their own account in
business activities of the type conducted by the Company.

Reports to Shareholders. The Company provides annual reports to the holders
of Common Shares containing audited financial statements with a report thereon
from the Company's independent public accountants and, upon request, quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year. See "Available Information."

SBA REGULATIONS

The Company primarily originates loans to small businesses that, among
other things, exceed the net worth, asset, income, number of employees or other
limitations applicable to the SBA programs utilized by PMC Capital. See
"-- Underwriting Criteria and Loan Originations." While the eligibility
requirements of

35
<PAGE> 38

the Section 7(a) of the SBA program vary by the industry of the borrower and
other factors, the general eligibility requirements of loans originated under
Section 7(a) of the SBA program are that: (i) gross sales of the borrower cannot
exceed a range of between $5.0 million and $21.5 million depending upon the
industry of the borrower (other than with respect to certain industries where
eligibility is determined based on a number of employees), (ii) when the total
amount of the proposed financing (a) is $250,000 or less, each 20% owner of the
applicant must contribute to the business personal liquid assets per the SBA
rules and regulations ("Personal Liquid Assets") in excess of two times the
total financing or $100,000, whichever is greater, (b) is between $250,0000 and
$500,000, each 20% owner of the applicant must contribute Personal Liquid Assets
to the business in excess of one and one-half times the total financing or
$500,000, whichever is greater and (c) exceeds $500,000, each 20% owner of the
applicant must contribute to the business Personal Liquid Assets in excess of
one times the total financing or $750,000, whichever is greater, and (iii) the
maximum aggregate SBA loan guarantees to a borrower cannot exceed $750,000.

Loans originated pursuant to the SBIC program are not guaranteed by SBA and
generally require that: (i) the net worth of the borrower and certain affiliates
of the borrower cannot exceed $18 million; and (ii) net income after Federal
income taxes of the borrower averages less than $6 million for the most recent
two years.

EMPLOYEES

The Company has no salaried employees. All personnel required for the
Company's operations are provided by the Investment Manager.

LEGAL PROCEEDINGS

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

36
<PAGE> 39

MANAGEMENT

TRUST MANAGERS AND OFFICERS

The Company is managed by its trust managers, who are elected annually by
the shareholders. The trust managers are responsible for appointing the
executive officers of the Company, for selecting, monitoring and supervising the
Investment Manager, for approving borrowings by the Company and for periodically
valuing the Company's portfolio. The trust managers are also responsible for the
adoption from time to time of such investment policies and limitations as they
may deem appropriate in light of the Company's investment objective.

The following table sets forth the names and positions of the trust
managers and officers of the Company.

<TABLE>
<CAPTION>
POSITIONS AND
NAME OFFICES WITH THE COMPANY(1)
----------------------------------------- -----------------------------------------
<S> <C>
Dr. Andrew S. Rosemore(2)................ Chairman of the Board, Executive Vice
President, Chief Operating Officer,
Treasurer and Trust Manager
Lance B. Rosemore(2)..................... President, Chief Executive Officer,
Secretary and Trust Manager
Jan F. Salit............................. Executive Vice President, Chief
Investment Officer and Assistant
Secretary
Barry N. Berlin.......................... Chief Financial Officer
Mary J. Brownmiller...................... Senior Vice President
Nathan G. Cohen(3)....................... Trust Manager
Dr. Martha R. Greenberg(2)............... Trust Manager
Roy H. Greenberg(3)...................... Trust Manager
Irving Munn(3)........................... Trust Manager
Dr. Ira Silver(3)........................ Trust Manager
</TABLE>

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

(1) All of the officers of the Company have held positions with the Company
since the formation of the Company on June 4, 1993.

(2) Lance B. Rosemore and Dr. Andrew S. Rosemore are brothers and Dr. Martha R.
Greenberg is their sister.

(3) Messrs. Cohen, Greenberg and Munn and Dr. Silver serve as Independent Trust
Managers.

Information concerning the trust managers and executive officers of the
Company is as follows:

DR. ANDREW S. ROSEMORE -- Dr. Rosemore, 49, has been Executive Vice
President, Chief Operating Officer and Treasurer of the Company since June 1993
and has been Chairman of the Board of Trust Managers since January 1994. He has
also been the Chief Operating Officer of PMC Capital since May 1992 and
Executive Vice President of PMC Capital since 1990. From 1988 to May 1990, Dr.
Rosemore was Vice President of PMC Capital. Dr. Rosemore has been a director of
PMC Capital since 1988.

MR. LANCE B. ROSEMORE -- Mr. Rosemore, 47, has been President, Chief
Executive Officer and Secretary of the Company since June 1993. He has also been
Chief Executive Officer of PMC Capital since May 1992 and President of PMC
Capital since 1990. Mr. Rosemore has been employed by PMC Capital since 1979.
From 1990 to May 1992, Mr. Rosemore was Chief Operating Officer of PMC Capital.
Mr. Rosemore has been Secretary of PMC Capital since 1983. Mr. Rosemore has been
a director of PMC Capital since 1983.

MR. JAN F. SALIT -- Mr. Salit, 46, has been Executive Vice President of the
Company since June 1993, and Chief Investment Officer and Assistant Secretary
since January 1994. He has also been Executive Vice

37
<PAGE> 40

President of PMC Capital since May 1993 and Chief Investment Officer and
Assistant Secretary of PMC Capital since March 1994. From 1979 to 1992, Mr.
Salit was employed by Glenfed Financial Corporation and its predecessor company
Armco Financial Corporation, a commercial finance company, holding various
positions including Executive Vice President and Chief Financial Officer.

MR. BARRY N. BERLIN --Mr. Berlin, 36, has been Chief Financial Officer of
the Company since June 1993. Mr. Berlin has also been Chief Financial Officer of
PMC Capital since November 1992. From August 1986 to November 1992, he was an
audit manager with Imber and Company, Certified Public Accountants. Mr. Berlin
is a Certified Public Accountant.

MS. MARY J. BROWNMILLER -- Ms. Brownmiller, 41, has been Senior Vice
President of the Company since June 1993. Ms. Brownmiller has also been Senior
Vice President of PMC Capital since 1992 and Vice President of PMC Capital since
November 1989. From 1987 to 1989, she was Vice President for Independence
Mortgage, Inc., an SBA lender. From 1976 to 1987, Ms. Brownmiller was employed
by the SBA, holding various positions including senior loan officer. While at
the SBA, Ms. Brownmiller was involved in making credit decisions, monitoring
adherence to SBA underwriting criteria and assisting in the final determination
as to the approval of loans of all sizes. Ms. Brownmiller is a Certified Public
Accountant.

MR. NATHAN G. COHEN --Mr. Cohen, 50, has been an Independent Trust Manager
of the Company since May, 1994. Mr. Cohen has been Controller and Chief
Financial Officer of ATCO Rubber Products, Inc., a manufacturer of products for
HVAC systems, since November 1986.

DR. MARTHA R. GREENBERG -- Dr. Greenberg, 45, has been a trust manager of
the Company since May 1996. Dr. Greenberg has practiced optometry for 17 years
in Russellville, Alabama. Dr. Greenberg has been a director of PMC Capital since
1984. Dr. Greenberg is not related to Mr. Roy H. Greenberg, but is the sister of
Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore.

MR. ROY H. GREENBERG -- Mr. Greenberg, 37, has been an Independent Trust
Manager of the Company since September 1993. Mr. Greenberg has been the
President of Whitehall Real Estate, Inc., a real estate management firm, since
December 1989. Prior thereto, he was Vice President of GHR Realty Holding Group,
Inc., a real estate management company, from June 1985 to December 1989. Mr.
Greenberg is not related to Dr. Martha R. Greenberg.

MR. IRVING MUNN -- Mr. Munn, 46, has been an Independent Trust Manager of
the Company since September 1993. Mr. Munn has been a principal of Kaufman, Munn
and Associates, P.C., a public accounting firm in Dallas, Texas or its
predecessor, since 1990. For more than two years prior thereto, Mr. Munn was a
manager with the accounting firm Philip Vogel & Co. in Dallas, Texas. Mr. Munn
is a Certified Public Accountant.

DR. IRA SILVER -- Dr. Silver, 50, has been an Independent Trust Manager of
the Company since May 1996. Dr. Silver has been employed by J.C. Penney Co.,
Inc. since 1978, is currently their Chief Economist and since 1984 has been a
Manager of Planning, Forecasting and Technical Support in the Planning and
Research Department. He holds a Ph.D in Economics from the City University of
New York. Dr. Silver had been a director of PMC Capital from 1992 through 1994.

All officers and trust managers hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal. The Company has elected four Independent Trust Managers who are not
affiliated with the Investment Manager or PMC Capital. Messrs. Greenberg and
Munn comprise the Audit Committee of the Board of Trust Managers and all of the
Independent Trust Managers serve as the administrators of the Share Option Plans
(as defined below).

A majority of the Independent Trust Managers must approve all transactions
between PMC Advisers or PMC Capital and the Company, including the approval and
renewal of the Investment Management Agreement. Although Dr. Silver served as a
director of PMC Capital from 1992 to 1994, the Company does not believe that
such relationship with PMC Capital affects his ability to serve as an
Independent Trust Manager. To the extent that any trust manager is interested in
a proposed transaction involving the Company, such trust manager would be
considered an interested party with respect to such transaction and such

38
<PAGE> 41

transaction must be approved by the disinterested trust managers as indicated
under "Transactions with Affiliates" below.

The Independent Trust Managers will each (i) be reimbursed by the Company
for their expenses in attending meetings of trust managers or any committee
thereof, (ii) receive a fee of $500 for attendance in person at each meeting,
and (iii) be granted options under the Trust Managers Plan (as defined below).
The Company's officers are employees of the Investment Manager and receive no
compensation from the Company for their services as officers or trust managers,
although they may receive options under the Employee Plan (as defined below).

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 9.20 of the Texas REIT Act, subject to procedures and limitations
stated therein, allows the Company to indemnify any person who was, is or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a trust manager or officer against judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable expenses
actually incurred by the person in connection with the proceeding. The Company
is required by Section 9.20 of the Texas REIT Act to indemnify a trust manager
or officer against reasonable expenses incurred by him in connection with a
proceeding in which he is a named defendant or respondent because he is or was a
trust manager or officer if he has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. Under the Texas REIT Act, trust
managers and officers are not entitled to indemnification if (i) the trust
manager or officer is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received and (ii)
the trust manager or officer was found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
The statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any provision of the Declaration of Trust, bylaws, agreements or
otherwise. In addition, the Company has, pursuant to Section 15.10 of the Texas
REIT Act, provided in its Declaration of Trust that, to the fullest extent
permitted by applicable law, a trust manager of the Company shall not be liable
for any act, omission, loss, damage or expense arising from the performance of
his duty under the Texas REIT Act, except for his own willful misfeasance,
malfeasance or negligence.

The Company's Declaration of Trust and Bylaws provide for indemnification
by the Company of its trust managers and officers to the fullest extent
permitted by the Texas REIT Act. In addition, the Company's Bylaws provide that
the Company may pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager or
officer made a party to a proceeding by reason of his status as a trust manager
or officer provided that (i) the trust managers have consented to the
advancement of expenses (which consent shall not unreasonably be withheld) and
(ii) the Company shall have received (a) a written affirmation by the trust
manager or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company under the Texas REIT Act
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met or it is ultimately determined that indemnification of
the trust manager or officer against expenses incurred by him in connection with
that proceeding is prohibited by Section 9.20 of the Texas REIT Act.

In addition, the Investment Management Agreement provides that the
Investment Manager shall be deemed an agent of the Company and the Investment
Manager and its directors, officers and employees shall be indemnified by the
Company to the same extent as the trust managers and officers of the Company.

SHARE OPTION PLANS

General. The Company has adopted the 1993 Employee Share Option Plan (the
"Employee Plan") and the 1993 Trust Manager Share Option Plan (the "Trust
Manager Plan," and together with the Employee Plan, the "Share Option Plans").
The purpose of the Share Option Plans is to provide a means of performance-based
compensation in order to attract and retain qualified personnel to serve as
trust managers and officers of the Company and to provide an incentive to others
such as the directors, officers or key

39
<PAGE> 42

employees of the Investment Manager whose job performance affects the Company.
The Share Option Plans each provide for administration by a committee of the
Independent Trust Managers established for such purpose (the "Plan
Administrators"). The exercise price for any option granted under the Share
Option Plans may not be less than 100% of the fair market value of the Common
Shares at the time the option is granted.

Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Share Option Plans authorize the grant of options to acquire
in the aggregate Common Shares in an amount equal to 6% of the issued and
outstanding Common Shares at any time. If an option granted under the Share
Option Plans expires or terminates, the Common Shares subject to any unexercised
portion of that option will again become available for the issuance of further
options under the Share Option Plans. Unless previously terminated by the trust
managers, the Share Option Plans will terminate on the tenth anniversary of the
effective date of the Share Option Plans and no options may be granted under the
Share Option Plans thereafter.

No options may be granted under the Share Option Plans to any person who,
assuming exercise of all options held by such person, would own or be deemed to
own more than 9.8% of the outstanding Common Shares. There is no limit on the
number of nonqualified options that may be granted to any one individual,
provided that the grant of the options may not cause the Company to fail to
qualify as a REIT. An optionee may, with the consent of the Plan Administrators,
elect to pay for the Common Shares to be received upon exercise of his options
in cash, Common Shares or any combination thereof.

The trust managers may, without affecting any outstanding options, from
time to time revise or amend the Share Option Plans, and may suspend or
discontinue the Share Option Plans at any time. However, no such revision or
amendment may increase the number of shares subject to the Share Option Plans
(with the exception of adjustments resulting from changes in capitalization),
change the class of participants eligible to receive options granted under the
Share Option Plans or modify the period within which or the terms upon which the
options may be exercised pursuant to the Share Option Plans without shareholder
approval.

The Employee Plan. The Employee Plan provides for the grant of both
qualified incentive share options ("ISOs") which meet the requirements of
Section 422 of the Code and nonqualified share options. ISOs may be granted to
the officers and key employees of the Company. Nonqualified share options may be
granted to the trust managers who are officers of the Company, other officers
and key employees (if any) of the Company and to the management, directors,
officers and key employees of the Investment Manager. Options granted under the
Employee Plan will become exercisable in accordance with the terms of the grant
made by the Plan Administrators. The Plan Administrators have discretionary
authority to select participants from among eligible persons and to determine at
the time an option is granted whether it is intended to be an ISO or a
nonqualified option, and when and in what increments Common Shares covered by
the option may be purchased. Under current law, ISOs may not be granted to any
trust manager of the Company who is not also a full time employee or to
directors, officers and other employees of entities unrelated to the Company.

With respect to ISOs granted under the Employee Plan, the exercise price
must be at least equal to the fair market value of the Common Shares on the date
of grant and the term cannot exceed five years. With respect to any individual,
the aggregate fair market value (determined at the time the option is granted)
of Common Shares with respect to which ISOs may be granted under the Employee
Plan, or any other plan of the Company, which options are exercisable for the
first time during any calendar year, may not exceed $100,000.

Each option must terminate no more than five years from the date it is
granted. Options may be granted on terms providing that they will be exercisable
either in whole or in part at any time or times during their respective terms,
or only in specified percentages at stated time periods or intervals during the
term of the option.

The Trust Manager Plan. Only Independent Trust Managers are eligible to
participate in the Trust Managers Plan which provides for the grant of
nonqualified stock options. The Trust Manager Plan is a nondiscretionary plan
pursuant to which options to purchase 2,000 Common Shares are granted to each
Independent Trust Manager on the date such trust manager takes office and
additional options to purchase 1,000 Common Shares are granted each year
thereafter on the anniversary date of the date that the trust

40
<PAGE> 43

manager takes office so long as such trust manager is re-elected to serve as a
trust manager. Such options are exercisable at the fair market value of the
Common Shares on the date of grant. The options granted under the Trust Manager
Plan become exercisable one year after date of grant and expire if not exercised
on the earlier of (i) 30 days after the option holder no longer holds office as
an Independent Trust Manager for any reason or (ii) within five years after date
of grant.

COMPENSATION OF TRUST MANAGERS

During 1995, the Independent Trust Managers received a $500 fee for each
meeting the Board of Trust Managers attended. The Independent Trust Managers
will be reimbursed by the Company for their expenses related to attending board
or committee meetings. For the year ended December 31, 1995, each of Messrs.
Cohen and Munn received $2,500 and Mr. Greenberg received $2,000 for services
rendered as Independent Trust Managers.

In accordance with the terms of the Trust Manager Plan, each of the
Independent Trust Managers is, on the anniversary date of his election to the
Board of Trust Managers, automatically granted options (which are exercisable
one year after the date of grant) to purchase 1,000 Common Shares. Accordingly,
each of Messrs. Greenberg and Munn was granted an option to acquire 1,000 Common
Shares on December 15, 1995, at an exercise price of $15.75 per share, and Mr.
Cohen was granted an option to acquire 1,000 Common Shares on May 10, 1995, at
an exercise price of $14.125 per share, in each case the exercise price was
equal to the fair market value of the Common Shares on the date of grant.

OPTION GRANTS

The following table sets forth information regarding stock options granted
to each of the executive officers in the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF SHARE
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- ------------------------------------------ ---------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Lance B. Rosemore............................... 6,000 27% $15.75 12/15/00 $26,108 $57,693
Andrew S. Rosemore.............................. 6,000 27% 15.75 12/15/00 26,108 57,693
Jan F. Salit.................................... 3,840 18% 15.75 12/15/00 16,709 36,924
Barry N. Berlin................................. 3,840 18% 15.75 12/15/00 16,709 36,924
Mary J. Brownmiller............................. 1,200 5% 15.75 12/15/00 5,222 11,539
</TABLE>

OPTION EXERCISES AND YEAR-END OPTION VALUES

The following table sets forth, for each of the executive officers,
information regarding exercise of stock options during the fiscal year ended
December 31, 1995 and the value of unexercised stock options as of December 31,
1995. The closing price for the Common Shares, as reported by the American Stock
Exchange, on December 29, 1995 (the last trading day of the fiscal year) was
$16.25.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED ON VALUE (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
NAME EXERCISE(#) REALIZED($) (#) ($)
- -------------------------- ----------- ----------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Lance B. Rosemore............ 7,675 35,017 13,675(u) 36,578(u)
Andrew S. Rosemore........... 7,675 35,017 13,675(u) 36,578(u)
Jan F. Salit................. 2,026 9,243 1,814(e)/7,680(u) 7,936(e)/18,720(u)
Barry N. Berlin.............. 1,498 6,834 2,342(e)/7,680(u) 10,246(e)/18,720(u)
Mary J. Brownmiller.......... 307 1,401 893(e)/2,400(u) 3,907(e)/5,850(u)
</TABLE>

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

(e) Options are exercisable within 60 days of the date hereof.

(u) Options are not exercisable within 60 days of the date hereof.

41
<PAGE> 44

INVESTMENT MANAGER

As a wholly-owned subsidiary and investment manager of PMC Capital, PMC
Advisers also generates lending opportunities which fulfill the investment
criteria of the Company. Through this advisory relationship, the Company
benefits from PMC Capital's over 17 years of operating history and over $350
million in assets under management. The principal address of the Investment
Manager is 17290 Preston Road, Third Floor, Dallas, Texas 75252 and its
telephone number is (214) 380-0044.

All of the directors and officers of PMC Advisers are also directors and
officers of PMC Capital. In addition, the trust managers, other than the
Independent Trust Managers, and the officers of the Company are directors and
officers of the Investment Manager. See "Risk Factors" and "Management." The
directors and officers of the Investment Manager are as follows:

<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME WITH THE INVESTMENT MANAGER
-------------------------------------- ---------------------------------------------
<S> <C>
Dr. Fredric M. Rosemore............... Chairman of the Board and Treasurer
Lance B. Rosemore(1)(2)............... President, Chief Executive Officer and
Secretary
Dr. Andrew S. Rosemore(1)(2).......... Executive Vice President and Chief Operating
Officer
Jan F. Salit(2)....................... Executive Vice President, Chief Investment
Officer and Assistant Secretary
Barry N. Berlin(2).................... Chief Financial Officer
Mary J. Brownmiller(2)................ Senior Vice President
Dr. Irvin M. Borish................... Director
Robert Diamond........................ Director
Dr. Martha R. Greenberg(1)(2)......... Director
Thomas Hamill......................... Director
Barry A. Imber........................ Director
Lee Ruwitch........................... Director
</TABLE>

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

(1) Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr. Martha
Greenberg is the daughter, of Dr. Fredric M. Rosemore.

(2) Also serve as trust managers or officers of the Company. See "Management"
for additional information with respect to such persons.

Information relating to the directors of the Investment Manager who do not
have a position with the Company is as follows:

DR. FREDRIC M. ROSEMORE -- Dr. Rosemore, 72, has been the Chairman of the
Board and Treasurer of PMC Capital since 1983. From 1990 to 1992, Dr. Rosemore
was a Vice President of PMC Capital and from 1979 to 1990, Dr. Rosemore was the
President of PMC Capital. For many years, he was engaged in diverse businesses,
including the construction of apartment complexes, factory buildings and
numerous commercial retail establishments. From 1948 to 1980, Dr. Rosemore
practiced optometry. He has been a director of PMC Capital since 1983.

DR. IRVIN M. BORISH -- Dr. Borish, 83, served as Benedict (Distinguished)
Professor of Optometry at the University of Houston, after retiring from Indiana
University, where he holds the status of Professor Emeritus. He practiced
optometry for over 30 years. He is the author of a major text in his field and
holds five patents in contact lenses. Dr. Borish has been a director of PMC
Capital since 1989.

MR. ROBERT DIAMOND -- Mr. Diamond, 64, has been an attorney for 39 years.
He is currently of counsel to the law firm of Diamond & Diamond, P.A., Millburn,
New Jersey. He served as a director of PMC Capital from 1982 to 1992 and
rejoined the Board of Directors in January 1994. He served as a member of the
Board

42
<PAGE> 45

of Directors of Allstate Financial Corporation from 1991 to 1993. He has managed
personal investments since 1991.

MR. THOMAS HAMILL -- Mr. Hamill, 42, has been the President, Chief
Executive Officer and a director of Caliban Holdings and its subsidiary,
Belvedere Holdings Ltd. ("Belvedere"), since 1993. From 1989 to 1993, Mr. Hamill
was the President, Chief Operating Officer and a director of Belvedere. From
September 1986 to December 1989, Mr. Hamill was Vice President of Belvedere
America Re and Vice President and Secretary of Belvedere Corporation. Mr. Hamill
is the Chairman of the Board and a non-executive director of Midlands Management
Corporation. Mr. Hamill has been a director of PMC Capital since 1992.

MR. BARRY A. IMBER -- Mr. Imber, 49, has been a principal of Imber and
Company, Certified Public Accountants, or its predecessor, since 1982. Imber and
Company was the independent certified public accountant for PMC Capital and its
subsidiaries for the years ended December 31, 1988 through December 31, 1991.
Mr. Imber was a Trust Manager of the Company from September 1993 to March 1995
and a director of PMC Capital since March 1995.

MR. LEE RUWITCH -- Mr. Ruwitch, 82, has managed personal investments since
1986. Since 1987, he has been the President of LFR Corporation and since 1992,
he has been a partner in TCA Joint Venture. Each of these entities is
principally engaged in the business of financial investments. From 1964 to 1986,
Mr. Ruwitch was the publisher and owner of Review Business Publications, Inc. in
Miami, Florida. From 1949 to 1964, he served as president of the company which
operates public television station WTVJ in Miami, Florida. Mr. Ruwitch has been
active in the communications industry for over 30 years. Mr. Ruwitch has been a
director of PMC Capital since 1984.

INVESTMENT MANAGEMENT AGREEMENT

The Company has entered into an Investment Management Agreement with the
Investment Manager. The Investment Management Agreement expires on December 31
of each year and is currently scheduled to expire on December 31, 1996; however,
it is renewable by the Company, subject to (i) a determination by a majority of
the Independent Trust Managers that the Investment Manager's performance has
been satisfactory, (ii) a determination by a majority of the Independent Trust
Managers that the terms of the Investment Management Agreement are appropriate
in light of the Company's performance and then existing economic conditions, and
(iii) the termination rights of the parties. The Investment Management Agreement
may be terminated for any reason upon 60 days' written notice by (i) a majority
vote of the Independent Trust Managers of the Company, (ii) a vote of the
holders of more than two-thirds of the outstanding Common Shares, or (iii) a
majority vote of the independent directors of the Investment Manager. Other than
the notice provision, there is no contractual impediment to the termination of
the Investment Management Agreement by the parties thereto. In the event the
Investment Management Agreement were terminated, a significant portion of the
then outstanding commitments would no longer be required to be funded by the
Company; however, such commitments will remain the obligations of PMC Advisers.
See "Risk Factors -- Reliance on Management and Investment Manager." The
Investment Management Agreement is not assignable by the Investment Manager
without the written consent of the Company. All transactions with the Investment
Manager must be approved by a majority of the Independent Trust Managers as well
as a majority of the independent directors of the Investment Manager, although
no shareholder approval of either party is required. Additionally, the
Investment Management Agreement may be amended, supplemented, discharged or
modified, provided that such amendment, supplement, discharge or modification,
in the case of the Company, is approved by a majority vote of the Independent
Trust Managers or a vote of the holders of more than two-thirds of the
outstanding Common Shares and, in the case of PMC Advisers, is approved by a
majority vote of its disinterested directors. While the Company has no current
relationship with any investment manager other than PMC Advisers, management of
the Company believes that in the event that the Investment Management Agreement
is not renewed, the Company can obtain the services of third party investment
advisors or hire sufficient personnel to internally manage the Company's
investments, although there is no assurance that similar investment management
services can be obtained on similar terms or in a timely manner. Additionally,
the Company may not independently originate or purchase mortgage loans while the
Investment Management Agreement is in effect. The Company's inability to find an
alternative

43
<PAGE> 46

investment manager on similar terms and its lack of experience in originating
loans could act as practical deterrents to the termination or modification of
the Investment Management Agreement by the Company. See "Risk
Factors -- Reliance on Management and Investment Manager."

Pursuant to the Investment Management Agreement, the Investment Manager,
under the supervision of the trust managers, identifies, evaluates, structures
and closes the investments made by the Company, arranges debt financing for the
Company, subject to the approval of the Independent Trust Managers, and is
responsible for monitoring the investments made by the Company, including loan
portfolio management and servicing.

The Company pays all operating expenses except those specifically required
to be borne by the Investment Manager pursuant to the Investment Management
Agreement. The operating expenses required to be borne by the Investment Manager
include any compensation to the Company's officers (other than stock options)
and the cost of office space, equipment and other personnel required for the
Company's day-to-day operations. The expenses paid by the Company include
transaction costs incident to the acquisition and disposition of investments,
regular legal and auditing fees and expenses, the fees and expenses of the
Company's Independent Trust Managers, the costs of printing and mailing proxies
and reports to shareholders and the fees and expenses of the Company's custodian
and transfer agent, if any. The Company, rather than the Investment Manager, is
also required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses. All fees that may be paid to the
Investment Manager by any person other than the Company in connection with any
investment transaction of the Company will be paid or credited to the Company.

Pursuant to the Investment Management Agreement, the Company pays to the
Investment Manager, quarterly in arrears, a Base Fee consisting of a quarterly
servicing fee of 0.125% of the Average Quarterly Value of All Assets,
representing on an annual basis approximately 0.5% of the Average Annual Value
of All Assets, and a quarterly advisory fee of .25% of the Average Quarterly
Value of all Invested Assets, representing on an annual basis approximately 1%
of the Average Annual Value of All Invested Assets. In addition, for each
calendar year during which the Actual Return exceeds 6.69%, the Company will pay
to the Investment Manager, as incentive compensation, the Annual Fee equal to
the product determined by multiplying the Average Annual Value of All Invested
Assets by a percentage equal to the difference between the Actual Return and
6.69%, up to a maximum of one percent (1%) per annum. The Annual Fee will be
earned only to the extent that the annual Return on Average Common Equity
Capital after deduction of the Base Fee and Annual Fee is at least equal to the
minimum return of 6.69%. The Annual Fee will be calculated and paid (to the
extent payable) on an annual basis without regard to cumulative performance
results from preceding years. All advisory fees will be reduced by 50% with
respect to the value of Invested Assets that exceed Common Equity Capital as a
result of leverage. In addition, the Base Fee shall be reduced for each quarter
during the term of the Investment Management Agreement by an amount equal to the
amount of servicing or supervisory servicing fees, if any, required to be paid
for such quarter by the Company to any third party which is unaffiliated with
the Company or the Investment Manager for the servicing of certain assets. The
quarterly fee and any Annual Fee are paid as soon as practical after the values
have been determined. See "Risk Factors -- Conflicts of Interest; Transactions
with Affiliates" and "Glossary."

The bases for the terms of the fees to be paid to PMC Advisers were (i) a
comparison of comparable fees charged by other investment advisors of mortgage
real estate investment trusts and (ii) negotiations between PMC Advisers and the
Company in consultation with the managing underwriters of the IPO. The Company
believes that, as a result of such comparisons and negotiations, the fees under
the Investment Management Agreement are comparable to the fees payable by other
mortgage real estate investment trusts to their investment managers.

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<PAGE> 47

The following table sets forth the management fees paid by the Company to
the Investment Manager for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ MARCH 31,
1994 1995 1996
--------- ---------- ------------
<S> <C> <C> <C>
Base Fees
Advisory Fee......................................... $133,831 $ 455,363 $136,688
Servicing Fee........................................ 246,876 266,792 82,716
-------- ---------- --------
Total Base Fee............................... 380,707 722,155 219,404
Annual Fee............................................. 48,104 467,565 136,688
-------- ---------- --------
Total Management Fee......................... $428,811 $1,189,720 $356,092
======== ========== ========
</TABLE>

Pursuant to the Investment Management Agreement, for the six month period
following any public offering of Common Shares by the Company (other than
pursuant to the Plan and the Share Option Plans), no additional servicing fees
will be charged by the Investment Manager with respect to the proceeds received
from such public offering. In addition, the proceeds of any such offering will
not be included in Common Equity Capital for determining the reduction of the
advisory fees as a result of leverage for such six month period. See "Glossary."

The trust managers believe that the compensation paid to the Investment
Manager under the Investment Management Agreement is fair in the context of (i)
the services to be provided by the Investment Manager, (ii) the fee arrangements
of investment advisers in other real estate investment trusts, (iii) the annual
renewal and termination provisions of the Investment Management Agreement, and
(iv) returns on similar investments. The ability of the Company to achieve an
Actual Return in excess of 6.69%, and of the Investment Manager to earn the
incentive compensation described in the preceding paragraph, is dependent upon
the level and volatility of interest rates, the Company's ability to react to
changes in interest rates and to utilize successfully the operating strategies
described herein, and other factors, many of which are not within the control of
the Company or the Investment Manager.

In accordance with the terms of the Investment Management Agreement, the
Investment Manager will be considered an agent of the Company for the purpose of
the indemnification provisions of the Company's Declaration of Trust and Bylaws
and will not be liable to the Company, its shareholders or creditors except for
violation of law or conduct which would preclude indemnification by the Company.

45
<PAGE> 48

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Shares as of May 31, 1996, by (i) the only
shareholder known to the management of the Company to own beneficially more than
5% of the outstanding Common Shares, (ii) each trust manager and executive
officer, and (iii) the trust managers and executive officers as a group. Each
person named in the table has sole voting and investment power with respect to
all of the Common Shares shown as beneficially owned by such person:

<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES PERCENT PRIOR
NAME AND ADDRESS BENEFICIALLY TO THE
OF BENEFICIAL OWNER OWNED OFFERING
-------------------------------------------------------- ------------- -------------
<S> <C> <C>
Dr. Andrew S. Rosemore(1).................................. 68,385 1.9%
Dr. Martha R. Greenberg.................................... 26,795 *
Lance B. Rosemore(2)....................................... 20,543 *
Nathan G. Cohen(3)......................................... 4,700 *
Irving Munn................................................ 4,000 *
Barry N. Berlin(4)......................................... 3,893 *
Jan F. Salit............................................... 3,840 *
Roy H. Greenberg........................................... 3,500 *
Mary J. Brownmiller........................................ 1,200 *
Peter B. Cannell & Co., Inc................................ 359,825(5) 10.0%
919 Third Avenue
New York, New York 10022
All trust managers and executive officers as a group (10
persons)**............................................... 136,856 3.8%
</TABLE>

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

* Less than 1%.

** Dr. Ira Silver owns no Common Shares.

(1) Includes 28,950 shares held by his profit sharing plan, 23,400 shares held
by his IRA account, 3,570 held in a trust of which Dr. Rosemore is the
beneficiary and 400 shares held in the name of his minor children.

(2) Includes 1,231 shares held in the name of his minor children, and 4,600
shares held in a trust of which Mr. Rosemore is the beneficiary.

(3) Includes 1,200 shares held in the name of his wife.

(4) Includes 53 shares held in the name of his minor child.

(5) Based on a statement on Schedule 13G filed with the Securities and Exchange
Commission on February 12, 1996. Peter B. Cannell & Co., Inc. ("Cannell") is
a registered investment adviser and the shares reported on the Schedule 13G
are held in client discretionary investment advisory accounts. While Cannell
may be deemed to be the beneficial owner of these shares under the rules of
the Securities and Exchange Commission, Cannell disclaims any beneficial
interest of all such Common Shares.

46
<PAGE> 49

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

GENERAL

The Declaration of Trust of the Company authorizes the Company to issue up
to 100,000,000 shares of beneficial interest of the Company ("Trust Shares"),
consisting of Common Shares, Preferred Shares and such other types of classes of
shares of beneficial interest as the trust managers may create and authorize
from time to time. Upon completion of the Offering, 5,639,346 Common Shares will
be issued and outstanding, excluding up to 300,000 Common Shares which may be
purchased by the Underwriters to cover over-allotments, if any. As of May 31,
1996, there were 3,579,346 Common Shares issued and outstanding.

The Company's Declaration of Trust also provides that, subject to the
provisions of any class or series of the capital shares of the Company then
outstanding, the shareholders of the Company shall be entitled to vote only on
the following matters: (i) election or removal of trust managers; (ii) amendment
of the Declaration of Trust; (iii) termination of the Company; (iv)
reorganization of the Company; (v) merger or consolidation of the Company or the
sale or disposition of all or substantially all of the Company's assets; and
(vi) termination of the Investment Management Agreement. Except with respect to
the foregoing matters, no action taken by the shareholders of the Company at any
meeting shall in any way bind the trust managers.

Both the Texas REIT Act and the Company's Declaration of Trust provide that
no shareholder of the Company will be individually or personally liable for any
obligation of the Company. The Company's Bylaws further provide that the Company
shall indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of his being or having been a
shareholder, and that the Company shall reimburse each shareholder for all legal
and other expenses reasonably incurred by him in connection with any such claim
or liability. In addition, it will be the Company's policy to include a clause
in its contracts which provides that shareholders assume no personal liability
for obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where shareholder liability is not so negated,
claims for taxes and certain statutory liability, the shareholder may, in some
jurisdictions, be individually or personally liable to the extent that such
claims are not satisfied by the Company. Inasmuch as the Company will carry
liability insurance which it considers adequate, any risk of personal liability
to shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.

Common Shares of Beneficial Interest. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of trust managers. There is no cumulative
voting in the election of trust managers, which means that the holders of
two-thirds of the outstanding Common Shares can elect all of the trust managers
then standing for election. Holders of Common Shares are entitled to such
distributions as may be declared from time to time by the trust managers out of
funds legally available therefor. See "Dividends and Distributions Policy."

Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares, if any.

Preferred Shares of Beneficial Interest. The Preferred Shares authorized by
the Company's Declaration of Trust may be issued from time to time in one or
more series in such amounts and with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms or conditions of redemption as may be fixed by the trust managers.
Under certain circumstances, the issuance of Preferred Shares could have the
effect of delaying, deferring or preventing a change of control of the Company
and may adversely affect the voting and other rights of the holders of the
Common Shares. Upon completion of the Offering, no Preferred Shares will be
outstanding and the Company has no present plans to issue any Preferred Shares
following the completion of the Offering.

47
<PAGE> 50

Classification or Reclassification of Common Shares of Beneficial Interest
or Preferred Shares of Beneficial Interest. The Declaration of Trust authorizes
the trust managers to classify or reclassify any unissued Common Shares or
Preferred Shares by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to distributions,
qualifications or terms or conditions of redemption.

RESTRICTIONS ON TRANSFER

For the Company to qualify as a REIT under the Code, (i) not more than 50%
in value of its outstanding Trust Shares may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year; (ii) the Trust Shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year; and
(iii) certain percentages of the Company's gross income must be from particular
activities. See "Federal Income Tax Considerations." Because the trust managers
believe it is essential for the Company to continue to qualify as a REIT, the
Declaration of Trust, subject to certain exceptions, provides that no holder
other than any person approved by the trust managers, at their option and in
their discretion (provided that such approval will not result in the termination
of the status of the Company as a REIT), may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% (the "Ownership
Limit") of the lesser of the number or value (in either case as determined in
good faith by the trust managers) of the total outstanding Trust Shares. The
trust managers may waive the Ownership Limit if evidence satisfactory to the
trust managers and the Company's tax counsel is presented that such ownership
will not then or in the future jeopardize the Company's status as a REIT. As a
condition of such waiver, the intended transferee must give written notice to
the Company of the proposed transfer and must furnish such opinions of counsel,
affidavits, undertakings, agreements and information as may be required by the
trust managers no later than the 15th day prior to any transfer which, if
consummated, would result in the intended transferee owning Trust Shares in
excess of the Ownership Limit. The foregoing restrictions on transferability and
ownership will not apply if the trust managers determine that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT. Any transfer or issuance of Trust Shares or any security
convertible into Trust Shares that would (i) create a direct or indirect
ownership of Trust Shares in excess of the Ownership Limit, (ii) with respect to
transfers only, result in the Trust Shares being owned by fewer than 100
persons, or (iii) result in the Company being "closely held" within the meaning
of Section 856(h) of the Code, shall be null and void, and the intended
transferee will acquire no rights to the Trust Shares. The Company's Declaration
of Trust provides that the Company, by notice to the holder thereof, may
purchase any or all Trust Shares (the "Excess Shares") that are proposed to be
transferred pursuant to a transfer which, if consummated, would result in the
intended transferee owning Trust Shares in excess of the Ownership Limit or
would otherwise jeopardize the REIT status of the Company. The purchase price of
any Excess Shares shall be equal to the fair market value of such Excess Shares
on the last trading day immediately preceding the day on which notice of such
proposed transfer was sent, as reflected in the closing sales price for the
Excess Shares, if then listed on a national securities exchange, or such price
for the Excess Shares on the principal exchange if then listed on more than one
national securities exchange, or, if the Excess Shares are not then listed on a
national securities exchange, the latest bid quotation for the Excess Shares if
then traded over-the-counter, or, if no such closing sales prices or quotations
are available, the fair market value as determined by the trust managers in good
faith. From and after the date fixed for purchase by the trust managers, so long
as payment of the purchase price for the Excess Shares to be so redeemed shall
have been made or duly provided for, the holder of such Excess Shares to be
purchased by the Company shall cease to be entitled to distributions, voting
rights and other benefits with respect to such Excess Shares except the right to
payment of the purchase price for the Excess Shares. Any dividend or
distribution paid to a proposed transferee on Excess Shares prior to the
discovery by the Company that such Excess Shares have been transferred in
violation of the provisions of the Company's Declaration of Trust shall be
repaid to the Company upon demand. If the foregoing transfer restrictions are
determined to be void or invalid by virtue of any legal decision, statute, rule
or regulation, then the intended transferee of any Excess Shares may be deemed,
at the option of the Company, to have acted as an agent on behalf of the Company
in acquiring such Excess Shares and to hold such Excess Shares on behalf of the
Company.

48
<PAGE> 51

All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% in number or value of the outstanding Trust Shares must
give a written notice to the Company containing the information specified in the
Company's Declaration of Trust by January 30 of each year. In addition, each
shareholder shall, upon demand, be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of Trust Shares as the trust managers deem necessary to comply with
the provisions of the Code applicable to a REIT, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.

American Stock Transfer and Trust Company acts as the Company's transfer
and dividend paying agent and registrar.

CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS

The following paragraphs summarize certain provisions of the Texas REIT Act
and the Company's Declaration of Trust and Bylaws. The summary does not purport
to be complete and reference is made to Texas law and the Company's Declaration
of Trust and Bylaws for complete information.

TRUST MANAGERS

The Company's Bylaws provide that the number of trust managers of the
Company shall be determined by the trust managers; provided, however, such
number shall not be less than three. Any vacancy occurring in the trust managers
may be filled by a vote of the majority of the trust managers or by the vote of
two-thirds of the outstanding Common Shares of the Company. At least a majority
of the trust managers must be natural persons and residents of the State of
Texas; however, trust managers need not be shareholders of the Company unless
the Company's Declaration of Trust or Bylaws so require. The trust managers of
the Company will each serve for a term of one year (except that an individual
who has been elected to fill a vacancy will hold office only for the unexpired
term of the trust manager he is replacing); provided, however, under the terms
of the Company's Declaration of Trust, the trust managers may, at any time and
from time to time, provide that in any subsequent election the trust managers
shall be divided into classes, so long as the term of office of a trust manager
shall be not more than three years and the term of office of at least one class
shall expire each year.

INVESTMENT OF TRUST ESTATE

Under the Texas REIT Act, the trust managers or officers have the power to
exercise complete discretion with respect to the investment of the trust estate
subject to the limitation that seventy-five percent (75%) of the total trust
assets shall be invested in real property (including the ownership and
co-ownership of land or improvements thereon and leaseholds of land or
improvements thereon), interests in mortgages on real property, shares in other
real estate investment trusts, cash and cash items (including receivables) and
government securities; provided, that (i) the trust managers or officers do not
have the power to invest in severed mineral, oil or gas royalty interests and
(ii) the trust managers or officers may invest any percentage of the trust
estate in a subsidiary corporation or entity, so long as such percentage
ownership is not contrary to or inconsistent with the section of the Code (or
any successor statute) which relates to or governs real estate investment trusts
or the regulations adopted under such sections.

AMENDMENT TO THE DECLARATION OF TRUST

Under the Texas REIT Act, the Company's Declaration of Trust may be
amended, from time to time, upon receipt of the affirmative vote of the holders
of at least two-thirds of the outstanding Common Shares of the Company. The
Company's Declaration of Trust, as amended, may contain only such provisions as
may lawfully be contained in the original Declaration of Trust at the time of
making such amendment.

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<PAGE> 52

TERMINATION OF THE TRUST AND SHAREHOLDER MEETINGS

The Company's Declaration of Trust permits the termination of the Company
and the discontinuation of the operations of the Company by the affirmative vote
of the holders of at least two-thirds of the outstanding Common Shares of the
Company. Upon receiving such vote, the trust managers shall liquidate the
Company and distribute the remaining property and assets of the Company among
its shareholders in accordance with their respective rights and interests after
applying such property to the payment of the liabilities and obligations of the
Company. For the annual meetings of shareholders in the years 2003, 2006 and
2009, the trust managers will include in the proxy statement a resolution to be
voted on by shareholders which, if approved by the holders of at least
two-thirds of the outstanding Common Shares, would require the trust managers to
initiate the orderly liquidation of the Company. The Bylaws of the Company
provide that the Company shall hold an annual meeting and may hold special
meetings of the shareholders which may be called by the trust managers, any
officer of the Company or the holders of at least 10% of the outstanding Trust
Shares. At each annual meeting of the shareholders, the shareholders will vote
on the election of trust managers and on any resolutions properly presented at
such annual meetings.

FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following discussion of the Federal tax rules governing a REIT and its
shareholders provides a summary of the material federal income tax consequences
affecting the Company and its shareholders and is based on the Code, judicial
decisions, Treasury Regulations, rulings and other administrative
interpretations, all of which are subject to change. Because many provisions of
the Code have been revised substantially by recent legislation, very few
judicial decisions, Treasury Regulations, rulings or other administrative
pronouncements have been issued interpreting many of the revisions to the Code.
Investors should be aware that Congress continues to consider new tax bills.
Accordingly, no assurance can be given that future legislation, administrative
regulations, rulings, or interpretations or court decisions will not alter
significantly the tax consequences described below or that such changes or
decisions will not be retroactive. The Company has not requested, nor does it
presently intend to request, a ruling from the Internal Revenue Service (the
"Service") with respect to any of the matters discussed below. Because the
provisions governing REITs are complex, no attempt is made in the following
discussion to discuss in detail all of the possible tax considerations
applicable to the Company or its shareholders, including state tax laws.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD SATISFY HIMSELF AS TO THE INCOME
AND OTHER TAX CONSIDERATIONS AND CONSEQUENCES OF HIS PARTICIPATION IN THE
COMPANY BY CONSULTING HIS OWN TAX ADVISOR BEFORE PURCHASING COMMON SHARES.

The Company has elected to be taxed as a REIT for Federal income tax
purposes commencing with its tax year ended December 31, 1993 and for each
subsequent taxable year. Based on the assumptions and representations summarized
below and the facts set forth in this Prospectus, Winstead Sechrest & Minick
P.C., counsel to the Company, is of the opinion that the Company has been
organized in conformity with the requirements for qualification as a REIT for
Federal income tax purposes and that its anticipated investments and its plan of
operation (which plan includes complying with all of the REIT requirements
described in this Prospectus) will enable it to continue to so qualify and that
the information contained in this section, to the extent it constitutes matters
of law or legal conclusions, is correct in all material respects. Except for
statements of fact or as otherwise specifically noted, the opinion covers all
matters set forth under this caption "Federal Income Tax Considerations." Unlike
a tax ruling (which will not be sought), an opinion of counsel, which is based
on counsel's review and analysis of existing law, is not binding on the Service.
Accordingly, no assurance can be given that the Service would not successfully
challenge the tax status of the Company as a real estate investment trust.

FEDERAL TAXATION OF THE COMPANY -- IN GENERAL

In general, as long as the Company qualifies as a REIT, it will not be
subject to Federal income tax on income or capital gain that it distributes in a
timely manner to shareholders.

50
<PAGE> 53

If the Service successfully challenged the tax status of the Company as a
REIT, the Company's income and capital gains would become subject to Federal
income tax (including any applicable minimum tax) at corporate rates.
Consequently, the amount of after tax earnings available for distribution to
shareholders would decrease substantially. In addition, "net capital gain" (net
long-term capital gain in excess of net short-term capital loss) distributed by
the Company would be taxed as ordinary dividends to shareholders rather than as
long-term capital gain. The Company would not be eligible to re-elect REIT
status under the Code until the fifth taxable year beginning after the taxable
year in which it failed so to qualify, unless its failure to qualify was due to
reasonable cause and not to willful neglect and certain other requirements were
satisfied. Also, immediately prior to requalification as a REIT under the Code,
the Company could be taxed on any unrealized appreciation in its assets.

Qualification of the Company as a REIT for Federal tax purposes will depend
on its continuing to meet various requirements governing, among other things,
the ownership of its Common Shares, the nature of its assets, the sources of its
income and the amount of its distributions to shareholders. Although the trust
managers and the Investment Manager intend to cause the Company to operate in a
manner that will enable it to comply with such requirements, there can be no
certainty that such intention will be realized. In addition, because the
relevant laws may change, compliance with one or more of the REIT requirements
may be impossible or impractical.

REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST

Although the Company must meet certain qualifications to be a real estate
investment trust under the Texas REIT Act (see "Certain Provisions of the Texas
REIT Act and of the Company's Declaration of Trust and Bylaws"), the Company
must independently qualify as a REIT under the Code. To qualify as a REIT under
the Code, the Company must properly elect to be a real estate investment trust
and must satisfy various requirements in each taxable year including, among
others, the following:

1. Share Ownership. (a) The beneficial ownership of Common Shares of
the Company must be held by a minimum of 100 persons for at least 335 days
of a taxable year consisting of 12 months (or a proportionate part of a
taxable year consisting of less than 12 full months), and (b) Common Shares
representing no more than 50% (by value) of the Company may be owned
(directly or under rules of constructive ownership prescribed by the Code)
by five or fewer individuals at any time during the last half of a taxable
year (the "50% Shareholder Test"). Certain tax-exempt entities are treated
as individuals for purposes of the 50% Shareholder Test. In addition, the
applicable constructive ownership rules provide, among other things, that
Common Shares held by a corporation, partnership, trust or estate will be
regarded as being held proportionately by its shareholders, partners or
beneficiaries, as the case may be, and Common Shares owned by certain
persons may be regarded as being owned by certain members of their
families. Common Shares held by a qualified pension plan will be treated as
held proportionately by its beneficiaries; however, Common Shares held by a
qualified pension plan will be treated as held by one individual if persons
related to the plan (such as the employer, employees, officers, or
directors) own in the aggregate more than 5% by value of the Common Shares
and the Company has accumulated earnings and profits attributable to any
period for which it did not qualify as a REIT.

To assure continued compliance with the 50% Shareholder Test, the
Company's Declaration of Trust prohibits any individual investor from
acquiring an interest in the Company such that the individual would own (or
be deemed under the applicable rules of constructive ownership to own) more
than 9.8% of the outstanding Common Shares, unless the trust managers
(including a majority of the Independent Trust Managers) are provided
evidence satisfactory to them in their sole discretion that the
qualification of the Company as a REIT will not be jeopardized.

Treasury Regulations require the Company to maintain records of the
actual and constructive beneficial ownership of its Common Shares. In
accordance with those regulations, the Company must and will demand from
shareholders written statements concerning the actual and constructive
beneficial ownership of Common Shares. Any shareholder who does not provide
the Company with required

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information concerning share ownership will be required to include certain
information relating thereto with his income tax return.

2. Asset Diversification. At the close of each quarter of the taxable
year, at least 75% of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in
real property, mortgages on real property and certain temporary
investments), cash, cash items and U.S. Government securities (the "75%
Asset Test"). In addition, at those times, the remaining 25% of the value
of the Company's total assets may not consist, in whole or in part, of
securities in respect of any one issuer in an amount greater in value than
5% of the value of the Company's total assets or more than 10% of the
outstanding voting securities of such issuer (the "25% Asset Test"). If the
Company is in violation of the foregoing requirements (due to a discrepancy
between the value of its investments and such requirements) after the
acquisition of any security or property, then the Company will be treated
as not violating the requirements if it cures the violation within 30 days
of the close of the quarter.

While the Investment Manager intends to manage the Company to meet the
75% Asset Test and 25% Asset Test, no assurance can be given that the
Company will be able to do so.

The assets of the Company's wholly-owned subsidiaries will be
attributed directly to the Company for purposes of the asset
diversification rules.

3. Sources of Income. The Company must satisfy three distinct
income-based tests for each taxable year: the "75% Income Test," the "95%
Income Test" and the "30% Income Test."

The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable
year consist of certain types of income identified in the Code, including
qualifying rents from real property; qualifying interest on obligations
secured by mortgages on real property or interests in real property; gain
from the sale or other disposition of real property (including interests in
real property and mortgages on real property) held for investment and not
primarily for sale to customers in the ordinary course of business; income
and gain from certain properties acquired by the Company through
foreclosure; and income earned from certain qualifying types of temporary
investments. Income earned from qualifying temporary investments means
income that is (i) attributable to stock or debt instruments, (ii)
attributable to the temporary investment of capital received by the Company
from the issuance of shares of beneficial interests or from a public
offering of debt securities that have a maturity of at least five years,
and (iii) received or accrued within one year from the date the Company
receives such capital. Interest income and gain realized from the
disposition of loans which are secured solely by real property will
constitute qualifying income for purposes of the 75% Income Test, assuming
that such interest income is not excluded from the calculation of interest
for purposes of the 75% Income Test by reason of such interest being
dependent on income or profits as described in Code Section 856(f) and
assuming that any such loan which is disposed of is held for investment and
not primarily for sale to customers in the ordinary course of a trade or
business.

Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year
must consist of income which qualifies under the 75% Income Test as well as
dividends and interest from any other source, gain from the sale or other
disposition of stock and other securities which is not dealer property, any
payment to the Company under an interest rate swap or cap agreement entered
into as a hedge against variable rate indebtedness incurred to acquire or
carry real estate assets, and any gain from the disposition of such an
agreement.

Finally, under the 30% Income Test, the Company must limit its
realization of certain types of income so that, in each taxable year, less
than 30% of its gross income is derived from sale or other disposition of
(a) stock or securities held for less than one year (which includes an
interest rate swap or cap agreement entered into by the Company as a hedge
against any variable rate indebtedness incurred to acquire or carry real
estate assets), (b) with certain limited exceptions, real property
(including interests in and mortgages on real property) held for less than
four years and (c) property in a transaction treated as a "prohibited
transaction" under the Code.

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Were the Company to experience prepayments or restructurings of loans
substantially in excess of the amount of prepayments or restructurings
currently expected, the Company might be unable to satisfy the 30% Income
Test. The Investment Manager will monitor compliance with this test. Were
prepayments or restructurings to exceed expected levels, the Company's
ability to dispose of other loans might be limited. Moreover, any
short-term capital gains realized upon the disposition of temporary
investments of working capital would be subject to the limitations imposed
by the 30% Income Test.

If the Company fails to meet the requirements of either or both the
75% Income Test or the 95% Income Test in a taxable year but otherwise
meets the applicable requirements for qualification as a REIT, it may
nevertheless continue to qualify under the Code as a REIT if certain
conditions are met. The conditions that must be satisfied include (i)
disclosure of each item of income in the REIT's tax return, (ii) any
incorrect information regarding each item of income must not be due to
fraud, and (iii) the failure to satisfy the tests must be due to reasonable
cause and not due to willful neglect. While satisfaction of the conditions
would prevent the Company from losing its tax status as a REIT, the Company
generally would be liable for a special tax with respect to the amount of
the Company's income which is nonqualifying for purposes of the 75% Income
Test or the 95% Income Test. The Code does not provide for any mitigation
provisions with respect to the 30% Income Test. Accordingly, if the Company
failed to meet the 30% Income Test, its tax status as a REIT would
terminate automatically.

4. Distribution Requirements. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum
of 95% of its "REIT taxable income" (generally, the taxable income of the
REIT, adjusted to (i) disallow the deduction for dividends received, (ii)
reduce the deduction for dividends paid to the extent attributable to net
income from foreclosure property, and (iii) exclude net income from
foreclosure property), excluding any net capital gain ("net investment
income"), and 95% of its net income from "foreclosure property" in excess
of the Federal income tax from such income, minus certain items of noncash
income. As noted in "Dividends and Distributions Policy," the Company
distributes substantially all of its net investment income annually. The
Company likewise distributes annually substantially all of its realized net
capital gains. The Service may waive the distribution requirements for any
tax year if the Company establishes that it was unable to meet such
requirements by reason of distributions previously made to meet the
requirement of section 4981 of the Code (relating to the 4% Federal excise
tax on undistributed income discussed below).

Unlike net investment income, the Company's net capital gain need not
be distributed in order for the Company to maintain its status under the
Code as a REIT; however, the Company will be taxable on any net capital
gain and net investment income which it fails to distribute in a timely
manner under Code rules.

While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash
flow or otherwise has excessive noncash income or nondeductible
expenditures. Furthermore, the distribution requirement may be determined
not to have been met in a given year by reason of the Service later
successfully challenging the deductibility of a Company expenditure. In
such event, however, it may be possible to cure a failure to meet the
distribution requirement with a "deficiency dividend," but if the Company
uses that procedure, it may incur substantial tax penalties and interest.

The Company will be subject to a nondeductible 4% Federal excise tax
with respect to undistributed ordinary income and capital gain net income
unless it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains
in excess of its capital losses (subject to certain adjustments), and (c)
any ordinary income and capital gain net income not distributed in prior
calendar years. The Company intends to make distributions to shareholders
so that it will not incur this tax but, as noted above, various situations
could make it impractical to meet the prescribed distribution schedule.

The Company is authorized to issue Preferred Shares. Should the
Company do so, and should the Company distribute a capital gain dividend
while Preferred Shares are outstanding, it may be required to

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designate a portion of dividends entitled to be received by holders of the
Preferred Shares as capital gain dividends, thereby reducing the portion of
total distributions paid to holders of the Company's Common Shares which
may be characterized as capital gains dividends.

FEDERAL TAXATION OF THE COMPANY -- SPECIFIC ITEMS

Acquisitions of Loans at a Discount. Some of the loans (with a fixed
maturity date of more than one year from the date of issuance) that the Company
may acquire will be treated as debt securities that are issued originally at a
discount. Generally, original issue discount ("OID") is treated like interest
income and would be included in the gross income of the Company over the term of
the loan, even though payment of that amount may not be received until a later
time, usually when the loan matures. Such income may adversely affect the
Company's ability to meet its distribution requirements.

It is likely that many of the loans (with a fixed maturity date of more
than one year from the date of issuance) that the Company intends to acquire
from certain governmental agencies will be treated as having market discount.
Generally, gain recognized on the disposition of, and any partial payment of
principal on, a loan having market discount is treated as interest income to the
extent the gain, or principal payment, does not exceed the "accrued market
discount" on the obligation. Market discount generally accrues in equal daily
installments. The Company may make one or more tax-related elections relating to
market discount, which could affect the character and timing of recognition of
income, including requiring market discount to be included in the Company's
gross income on a ratable daily basis or a constant interest rate basis.

The Company generally will be required to distribute dividends to
shareholders representing discount income that is currently includable in the
Company's gross income, even though cash representing such income may not yet
have been received by the Company. Cash to pay such dividends may have to be
obtained from the sale of assets held by the Company or through borrowing or the
Company may have to make a taxable stock dividend.

Dispositions of Assets. The Company may realize a gain or loss on the
disposition of an asset (such as a loan) that it owns. The gain or loss may be
capital or ordinary in character, depending upon a number of factors and the tax
rules governing the type of disposition involved.

If the Company were deemed to be holding property (such as real property or
loans) primarily for sale to customers in the ordinary course of business (i.e.,
as a "dealer"), then (a) any gains recognized by the Company upon the
disposition of such property could be subject to a 100% tax on prohibited
transactions and (b) depending on the composition of the Company's total gross
income, the Company could fail the 30% Income Test or the 75% Income Test for
qualification as a real estate investment trust.

Under existing law, whether property is held primarily for sale to
customers in the ordinary course of business must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Company intends to hold all property for investment purposes and
to make occasional dispositions which are, in the opinion of the trust managers
and the Investment Manager, consistent with the Company's investment objectives
and in compliance with all the rules discussed above governing the qualification
of the Company for REIT status under the Code. Accordingly, the Company does not
expect to be treated as a "dealer" with respect to any of its assets. No
assurance, however, can be given that the Service will not take a contrary
position.

TAXATION OF SHAREHOLDERS

Distributions by the Company of net investment income will be taxable to
shareholders as ordinary income to the extent of the current or accumulated
earnings and profits of the Company. Distributions of net capital gain, if any,
designated by the Company as capital gain dividends generally will be taxable to
shareholders as long-term capital gain, regardless of the length of time the
Common Shares have been held by the shareholders. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income pursuant to Section 291 of the Code. All
distributions are taxable, at least to the extent of the current or accumulated
earnings and profits of the Company, whether received in cash or

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invested in additional Common Shares. Dividends declared by the Company in
October, November or December payable to shareholders of record on a date in
such a month and paid during the following January will be treated as having
been received by shareholders on December 31 in the year in which such dividends
were declared. Income (including dividends) from the Company normally will be
characterized as "portfolio" income (as opposed to "passive" income) for
purposes of the tax rules governing "passive" activities; accordingly, passive
losses of the shareholder may not be used to offset income derived by the
shareholder from the Company.

None of the distributions from the Company (as a REIT) received by
corporate shareholders, whether characterized as ordinary income or capital
gain, will qualify for the dividends received deduction generally available to
corporations.

The Company may be required to withhold and remit to the Service 31% of the
dividends paid to any shareholder who (a) fails to furnish the Company with a
properly certified taxpayer identification number, (b) has under reported
dividend or interest income to the Service or (c) fails to certify to the
Company that he is not subject to backup withholding. Any amount paid as backup
withholding will be creditable against the shareholder income tax liability. The
Company will report to its shareholders and the Service the amount of dividends
paid during each calendar year and the amount of any tax withheld.

In general, any gain or loss realized upon a taxable disposition of Common
Shares of the Company or upon receipt of a liquidating distribution by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Shares have been held for more than one year
and as short-term capital gain or loss if the Common Shares have been held for
one year or less. If, however, the shareholder receives any capital gain
dividends with respect to Common Shares held six months or less, any loss
realized upon a taxable disposition of such Common Shares shall, to the extent
of such capital gain dividends, be treated as a long-term capital loss. All or a
portion of any loss realized upon a taxable disposition of Common Shares of the
Company may be disallowed if other Common Shares of the Company are purchased
(under a dividend reinvestment plan or otherwise) within 30 days before or after
the disposition.

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Except as noted below, based upon a revenue ruling issued by the Service,
dividend distributions by the Company to a shareholder that is a tax-exempt
entity should not constitute "unrelated business taxable income" ("UBTI"),
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares are not otherwise used in an unrelated trade or business of
the tax-exempt entity. However, if a tax-exempt entity borrows money to purchase
its Common Shares, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules of the Code. Furthermore, social
clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal service organizations that are exempt
from taxation under Code Sections 501(c)(7), (9), (17) and (20), respectively,
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. Also, it should be noted
that dividend distributions by a REIT to an exempt organization that is a
private foundation should constitute investment income for purposes of the
excise tax on net investment income of private foundations imposed by Section
4940 of the Code. For tax years beginning after 1993, if an employee trust
qualified under Code Section 401(a)(a "qualified trust") owns more than 10% by
value of the Common Shares in the Company at any time during a tax year, then a
portion of the dividends paid by the Company to such trust may be treated as
UBTI, but only if (i) the Company would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified trust for purposes of
determining ownership of a REIT and (ii) at least one qualified trust holds more
than 25% (by value) of the Common Shares in the Company or one or more qualified
trusts (each of which holds more than 10% of the Common Shares) hold in the
aggregate more than 50% (by value) of the Common Shares.

Because of the complexity and variations of the UBTI rules, tax-exempt
entities should consult their own tax advisors.

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Tax exempt shareholders should also note that the Company might be regarded
as a "taxable mortgage pool" under the Code. See "Other Taxation" below.

TAXATION OF FOREIGN SHAREHOLDERS

The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
non-U.S. shareholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws with regard to an
investment in Common Shares, including any reporting requirements.

Distributions that are not attributable to gain from sales or exchanges by
the Company of "United States Real Property Interests" and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Generally, such distributions will be subject to a
U.S. withholding tax equal to 30% of the gross amount of the distribution unless
an applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Shares is treated as effectively connected with the
non-U.S. shareholder's conduct of a United States trade or business, the
non-U.S. shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the case of a
shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends made to a non-U.S. shareholder unless (a) a lower treaty rate applies
and the non-U.S. shareholder files an IRS Form 1001 or (b) the non-U.S.
shareholder files an IRS Form 4224 with the Company claiming that the
distribution is effectively connected income. Such distributions in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
Common Shares. To the extent that such distributions exceed the adjusted basis
of a non-U.S. shareholder's Common Shares, they will give rise to tax liability
if the non-U.S. shareholder would otherwise be subject to tax on any gain from
the sale or disposition of his Common Shares in the Company, as described below.
If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the distributions will be subject to withholding at the same rate as
dividends. However, amounts thus withheld are refundable if it subsequently is
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.

For any year in which the Company qualifies as a real estate investment
trust, distributions that are attributable to gain from sales or exchanges by
the Company of "United States real property interests" will be taxed to a
non-U.S. shareholder under the provisions of the Foreign Investment in Real
Property Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these
distributions are taxed to a non-U.S. shareholder as if such gain were
effectively connected with a United States business. Non-U.S. shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax). Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder not entitled to treaty exemption. The Company is required
by applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by the Company as a capital gain dividend to the extent that
such capital gain dividends are attributable to the sale or exchange by the
Company of United States real property interests. This amount is creditable
against the non-U.S. shareholder's Federal tax liability. Fixed rate mortgage
loans will not normally be classified as "United States real property
interests."

Gain recognized by a non-U.S. shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled real estate investment trust," defined generally as a real estate
investment trust in which at all times during a specified testing period less
than 50% in value of the Common Shares were held directly or indirectly by
non-U.S. persons or if the Company is not classified as a "United States Real
Property Holding Corporation." Additionally, gain recognized by a non-U.S.
shareholder upon a sale of Common Shares generally will not be taxed under
FIRPTA unless the shareholder

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beneficially owns more than 5% of the total fair market value of the Common
Shares at any time during the shorter of the five-year period ending on the date
of disposition or the period during which the shareholder held the Common
Shares. Gain not subject to FIRPTA will be taxable to a non-U.S. shareholder if
(a) investment in the Common Shares is effectively connected with the non-U.S.
shareholder's United States trade or business, in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (b) the non-U.S. shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year, in which case the nonresident alien individual will be subject to
a 30% tax on his U.S. source capital gains. If the gain on the sale of Common
Shares becomes subject to taxation under FIRPTA, the non-U.S. shareholder will
be subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).

Subject to the provisions of any tax treaty that may exist between the
United States and the country in which the foreign holder is domiciled at the
time of his death, an individual foreign shareholder who owns Common Shares at
the time of his death will have the Common Shares subject to United States
Federal estate tax. The United States Federal estate tax will be assessed on the
fair market value of such Common Shares at the time of the foreign holder's
death.

OTHER TAXATION

Under legislation which became effective in 1992, certain entities which
employ leverage and whose assets consist principally of real estate mortgages
may be classified as taxable mortgage pools. To date, the Service has issued
practically no guidance on the classification of REITs as taxable mortgage pools
and it is unclear whether the Company would ever be classified as one. As a
result, counsel to the Company is rendering no opinion as to whether the Company
would be taxable as a mortgage pool. If it were, pursuant to regulations yet to
be promulgated by the Service, it is possible that certain distributions by the
Company could not be offset by a shareholder's net operating losses and that
such distributions would be treated as UBTI in the hands of a tax-exempt
shareholder. It is not known when, if at all, regulations on this subject will
be issued.

Tax treatment of the Company and its shareholders under tax laws other than
those governing Federal income tax may differ substantially from the Federal
income tax treatment described in this summary. CONSEQUENTLY, EACH PROSPECTIVE
SHAREHOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISOR WITH REGARD TO THE STATE,
LOCAL AND OTHER TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.

ERISA CONSIDERATIONS

Because the Common Shares should qualify as a "publicly-offered security,"
plans subject to Title I of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA Plans"), Individual Retirement Accounts ("IRAs") and H.R.10
Plans ("Keogh Plans") may purchase Common Shares and treat such Common Shares,
and not the Company's assets, as plan assets. A fiduciary of an ERISA Plan
should consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in Common Shares. Accordingly, among other factors, such fiduciary
should consider (i) whether the plan's aggregate investments (including such an
investment) satisfy the diversification requirements of Section 404(a)(1)(C) of
ERISA, (ii) whether the investment is in accordance with ERISA, the Code and the
documents and instruments governing the plan (as required by Section
404(a)(1)(D) of ERISA), and (iii) whether the investment is prudent, considering
the role such an investment plays in the plan's portfolio, the nature of the
Company's business, the possible limitations on the marketability of Common
Shares and the anticipated earnings of the Company. Investors proposing to
purchase Common Shares for their IRAs and Keogh Plans should consider that an
IRA and a Keogh Plan may only make investments that are authorized by the
appropriate governing instruments. Moreover, Keogh Plans that cover common law
employees are also subject to the ERISA fiduciary standards described above.

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Any ERISA Plan or Keogh Plan covering common law employees should also
consider prohibitions in ERISA relating to improper delegation of control over
or responsibility for "plan assets," prohibitions in ERISA and in the Code
relating to an ERISA Plan's engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan, and other provisions in ERISA
dealing with "plan assets." The Code provisions relating to a plan's engaging in
certain transactions involving "plan assets" with persons who are "disqualified
persons" under the Code with respect to the plan also apply to IRAs and all
Keogh Plans.

If the assets of the Company were deemed to be "plan assets" of plans that
are holders of Common Shares, Subtitle A and Parts 1 and 4 of Subtitle B of
Title I of ERISA (the prudence and fiduciary standards) with respect to ERISA
Plans and Keogh Plans covering common law employees, and Section 4975 of the
Code (the prohibitions on transactions involving disqualified persons) with
respect to ERISA Plans, IRAs and Keogh Plans, would extend to transactions
entered into and decisions made by the Company's management. Furthermore, the
Company's management would be deemed to be fiduciaries with respect to such
plans.

ERISA and the Code do not define "plan assets." On November 13, 1986, the
U.S. Department of Labor published a final regulation, amended on December 31,
1986 and effective March 13, 1987, relating to the definition of "plan assets,"
under which the assets of an entity in which employee benefits plans, including
ERISA Plans, IRAs and Keogh Plans, acquire interests would be deemed "plan
assets" under certain circumstances (the "Regulation"). The Regulation generally
provides that when a plan acquires an equity interest in an entity which is a
"publicly-offered security," the plan's assets include only the acquired equity
interest and not any interest in the underlying assets of the entity. The
Regulation defines a "publicly-offered security" as a security that is "widely
held," freely transferable and registered pursuant to certain provisions of the
Federal securities laws. The Company believes that the Common Shares offered
hereby will be a "publicly-offered security," and thus that the Company's assets
will not be deemed to be assets of any employee benefit plan that is a holder of
Common Shares.

FIDUCIARIES OF EMPLOYEE BENEFIT PLANS THAT ARE PROSPECTIVE SHAREHOLDERS
SHOULD CONSULT WITH THEIR OWN COUNSEL AND FINANCIAL ADVISORS TO DETERMINE THE
CONSEQUENCES UNDER ERISA OF AN INVESTMENT IN THE COMPANY, AND TO DETERMINE THE
PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE CIRCUMSTANCES OF THAT PARTICULAR
PLAN AND CURRENT APPLICABLE LAW.

58
<PAGE> 61

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement among the
Company, the Investment Manager and Oppenheimer & Co., Inc., J.C. Bradford & Co.
and Fahnestock & Co. Inc., as the Representatives of the Underwriters, each of
the Underwriters named below has severally agreed to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the respective number of
Common Shares set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
-------------------------------------------------------------------------------------
<S> <C>
Oppenheimer & Co., Inc..................................................
J.C. Bradford & Co......................................................
Fahnestock & Co. Inc....................................................

-------------
Total................................................................. 2,000,000
============
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel, and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above Common Shares if any are purchased.

The Underwriters propose to offer the Common Shares directly to the public
at the public offering price set forth on the cover page of this Prospectus, and
at such price less a concession not in excess of $ per share to certain
other dealers who are members of the National Association of Securities Dealers,
Inc. The Underwriters may allow, and such dealers may re-allow, concessions not
in excess of $ per share to certain other dealers. The offering price
and other selling terms may be changed by the Underwriters.

The Underwriters have been granted a 30-day over-allotment option to
purchase up to an aggregate of 300,000 additional Common Shares, exercisable at
the public offering price less the underwriting discount. If the Underwriters
exercise such over-allotment option, then each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of Common Shares to be purchased by it as
shown in the above table bears to the 2,000,000 Common Shares offered hereby.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Shares offered hereby. The
Representatives of the Underwriters have informed the Company that they do not
expect the Underwriters to confirm sales of Common Shares offered hereby to
accounts over which they exercise discretionary authority.

The Company and the Investment Manager have agreed to indemnify the
Underwriters against losses, claims, damages, liabilities and expenses that
arise out of or are based upon any untrue statement of, or omission or alleged
omission to state, a material fact in the Registration Statement or any
prospectus or any amendments or supplements thereto (unless based upon
information furnished by the Underwriters or in certain instances where an
Underwriter fails to deliver a prospectus) and to contribute to payments that
the Underwriters may be required to make in respect thereof.

The Company is concurrently, by means of this Prospectus, offering 60,000
Common Shares directly to certain trust managers and officers of the Company, at
a price equal to $ per share less underwriting

59
<PAGE> 62

discounts and commissions payable with respect to the Common Shares offered to
the public. The sale of Common Shares in the Direct Offering is contingent on
the purchase of Common Shares by the Underwriters in the Underwritten Offering.
There is no minimum number of Common Shares to be purchased in the Direct
Offering.

The Company has agreed that it will not offer, sell, grant any option
(other than pursuant to the Share Option Plans) for the sale of, or otherwise
dispose of any shares or any securities convertible into or exchangeable for, or
rights to purchase or acquire Common Shares, for a period of 180 days after the
date hereof without the prior written consent of Oppenheimer & Co., Inc. In
addition, the officers and trust managers of the Company have agreed with the
Underwriters not to offer, sell or otherwise dispose of any Common Shares for a
period of 180 days after the date hereof without the prior written consent of
Oppenheimer & Co., Inc.

LEGAL MATTERS

The legality of the Common Shares offered hereby will be passed upon for
the Company by Winstead Sechrest & Minick P.C., Dallas, Texas. Certain legal
matters will be passed on for the Underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Simpson Thacher & Bartlett will rely as to all matters of Texas law on the
opinion of Winstead Sechrest & Minick P.C.

EXPERTS

The financial statements of the Company as of and for the period from June
4, 1993 (date of inception) to December 31, 1993 and for each of the two years
in the period ended December 31, 1995, have been audited by Coopers & Lybrand
L.L.P. as stated in its report with respect thereto and have been so included in
reliance upon the report of such firm and upon its authority as an expert in
accounting and auditing.

60
<PAGE> 63

GLOSSARY

The following terms as used in this Prospectus are briefly defined below:

Annual Fee.................... For each calendar year during which the
Company's annual Return on Average Common
Equity Capital after deduction of the Base
Fee (the "Actual Return") exceeds 6.69% (the
"Minimum Return"), the Company will pay the
Investment Manager an additional advisory fee
equal to the product determined by
multiplying the Average Annual Value of All
Invested Assets by a percentage equal to the
difference between the Actual Return and the
Minimum Return, up to a maximum of one
percent (1%) per annum. The Annual Fee will
be earned only to the extent that the annual
Return on Average Common Equity Capital after
deduction of the Base Fee and Annual Fee is
at least equal to the Minimum Return.

Average Annual Value of All
Assets........................ The book value of total assets determined in
accordance with GAAP on the first day of the
year and on the last day of each quarter of
such year, divided by five.

Average Annual Value of All
Invested Assets............. The book value of Invested Assets determined in
accordance with GAAP on the first day of the
year and on the last day of each quarter of
such year, divided by five.

Average Common Equity
Capital....................... The Common Equity Capital on the first day of
the year and on the last day of each quarter
of such year, divided by five.

Average Quarterly Value of
All Assets.................. The book value of total assets determined in
accordance with GAAP on the first day of the
quarter and on the last day of the quarter,
divided by two.

Average Quarterly Value of All
Invested Assets............. The book value of Invested Assets determined in
accordance with GAAP on the first day of the
quarter and on the last day of the quarter,
divided by two.

Base Fee...................... Quarterly in arrears, a fee consisting of a
quarterly servicing fee of .125% of the
Average Quarterly Value of All Assets and a
quarterly advisory fee of .25% of the Average
Quarterly Value of All Invested Assets.

Common Equity Capital......... The sum of the stated capital plus the
additional paid-in capital for the Common
Shares.

Dividend Reinvestment Plan.... The plan adopted by the Company pursuant to
which dividends and other Plan cash
distributions are automatically invested by
the Plan Agent for the account of a
shareholder electing to participate in the
Plan in additional newly issued Common Shares
of the Company.

GAAP.......................... Generally accepted accounting principles.

Independent Trust Managers.... The trust managers of the Company who are not
affiliated with PMC Capital or its
subsidiaries.

Invested Assets............... The Primary Investments plus the Other
Investments.

61
<PAGE> 64

Other Investments............. The Company's investments in (i) loans which
are current at the time of the Company's
commitment to purchase, acquired from certain
governmental agencies and other sellers,
which meet the Company's underwriting
criteria, (ii) other commercial loans secured
by real estate, and (iii) real estate.

Primary Investments........... Loans to small businesses secured by the first
liens on real estate, originated by the
Company to borrowers who meet the Company's
underwriting criteria.

Retained Earnings............. The sum of cumulative net income and cumulative
dividends paid.

Return on Average Common
Equity Capital.............. Net income of the Company as determined in
accordance with GAAP, less preferred
dividends, if any, divided by the Average
Common Equity Capital.

62
<PAGE> 65

PMC COMMERCIAL TRUST

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996..... F-3
Consolidated Statements of Income for the period June 4, 1993 (date of inception) to
December 31, 1993, the years ended December 31, 1994 and 1995, and the three
months ended March 31, 1995 and 1996............................................. F-4
Consolidated Statements of Beneficiaries' Equity for the period June 4, 1993 (date
of inception) to December 31, 1993, the years ended December 31, 1994 and 1995,
and the three months ended March 31, 1996........................................ F-5
Consolidated Statements of Cash Flows for the period June 4, 1993 (date of
inception) to December 31, 1993, the years ended December 31, 1994 and 1995, and
the three months ended March 31, 1995 and 1996................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 66

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Trust Managers
PMC Commercial Trust:

We have audited the accompanying balance sheets of PMC Commercial Trust as
of December 31, 1994 and 1995, and the related statements of income,
beneficiaries' equity, and cash flows for the period June 4, 1993 (date of
inception) to December 31, 1993 and for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
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 referred to above present fairly,
in all material respects, the financial position of PMC Commercial Trust as of
December 31, 1994 and 1995, the results of its operations and its cash flows for
the period June 4, 1993 (date of inception) to December 31, 1993 and for each of
the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Dallas, Texas
March 20, 1996

F-2
<PAGE> 67

PMC COMMERCIAL TRUST

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Investments:
Loans receivable, net................................. $32,693,752 $59,129,536 $62,957,636
Cash equivalents...................................... 18,809,314 173,679 16,830,812
Restricted investments................................ -- -- 2,411,276
----------- ----------- -----------
Total investments....................................... 51,503,066 59,303,215 82,199,724
----------- ----------- -----------
Other assets:
Cash.................................................. 40,789 33,504 173,946
Interest receivable................................... 208,525 410,073 384,055
Deferred borrowing costs.............................. -- -- 357,754
Other assets, net..................................... 32,141 50,483 50,000
----------- ----------- -----------
Total other assets...................................... 281,455 494,060 965,755
----------- ----------- -----------
Total assets............................................ $51,784,521 $59,797,275 $83,165,479
=========== =========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable......................................... $ -- $ 7,920,000 $29,500,000
Dividends payable..................................... 1,033,659 1,518,896 1,310,166
Accounts payable...................................... -- 14,175 5,859
Interest payable...................................... -- 56,267 227,921
Borrower advances..................................... 2,346,162 579,133 1,106,265
Unearned commitment fees.............................. 560,728 599,978 816,611
Due to affiliates..................................... 184,523 844,786 1,043,627
Unearned construction monitoring fees................. 219,048 81,008 154,061
----------- ----------- -----------
Total liabilities....................................... 4,344,120 11,614,243 34,164,510
----------- ----------- -----------
Commitments and contingencies (Note 9)
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 3,444,530,
3,491,716 and 3,540,988 shares issued and
outstanding at December 31, 1994, December 31, 1995
and March 31, 1996, respectively................... 34,445 34,917 35,410
Additional paid-in capital............................ 47,704,383 48,326,337 49,109,477
Cumulative net income................................. 3,215,294 8,111,318 9,455,788
Cumulative dividends.................................. (3,513,721) (8,289,540) (9,599,706)
----------- ----------- -----------
Total beneficiaries' equity............................. 47,440,401 48,183,032 49,000,969
----------- ----------- -----------
Total liabilities and beneficiaries' equity............. $51,784,521 $59,797,275 $83,165,479
=========== =========== ===========
Net asset value per share............................... $ 13.77 $ 13.80 $ 13.84
=========== =========== ===========
</TABLE>

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

F-3
<PAGE> 68

PMC COMMERCIAL TRUST

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
JUNE 4, 1993
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1993 1994 1995 1995 1996
------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income -- loans........ $ 3,039 $2,289,355 $5,610,391 $1,106,929 $1,795,603
Interest and dividends -- other
investments.................. 12,678 1,221,768 324,779 230,617 54,348
Other income.................... -- 179,649 295,245 84,002 56,835
---------- ---------- ---------- ---------- ----------
Total revenues.................... 15,717 3,690,772 6,230,415 1,421,548 1,906,786
---------- ---------- ---------- ---------- ----------
Expenses:
Advisory and servicing fees,
net.......................... -- 357,311 945,720 160,730 276,092
Legal and accounting fees....... -- 32,628 70,940 26,143 9,190
General and administrative...... 565 63,543 96,028 33,116 25,265
Interest........................ -- 37,148 221,703 16,435 251,769
---------- ---------- ---------- ---------- ----------
Total expenses.................... 565 490,630 1,334,391 236,424 562,316
---------- ---------- ---------- ---------- ----------
Net income........................ $15,152 $3,200,142 $4,896,024 $1,185,124 $1,344,470
========== ========== ========== ========== ==========
Weighted average shares
outstanding..................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
========== ========== ========== ========== ==========
Net income per share.............. $ 0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
========== ========== ========== ========== ==========
</TABLE>

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

F-4
<PAGE> 69

PMC COMMERCIAL TRUST

CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 IS UNAUDITED)

<TABLE>
<CAPTION>
COMMON
SHARES OF ADDITIONAL CUMULATIVE TOTAL
BENEFICIAL PAR PAID-IN NET CUMULATIVE BENEFICIARIES'
INTEREST VALUE CAPITAL INCOME DIVIDENDS EQUITY
---------- ------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 4, 1993 (Inception)......... -- $ -- $ -- $ -- $ -- $ --
Shares issued upon formation............. 200 2 2,788 -- -- 2,790
Initial shares sold to public............ 3,000,000 30,000 44,970,000 -- -- 45,000,000
Initial shares sold through direct
offering............................... 99,330 993 1,384,660 -- -- 1,385,653
Issuance costs........................... -- -- (3,462,365) -- -- (3,462,365)
Net income............................... -- -- -- 15,152 -- 15,152
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1993................ 3,099,530 30,995 42,895,083 15,152 -- 42,941,230
Additional shares sold through initial
public offering........................ 345,000 3,450 5,171,550 -- -- 5,175,000
Issuance costs........................... -- -- (362,250) -- -- (362,250)
Dividends ($1.02 per share).............. -- -- -- -- (3,513,721) (3,513,721)
Net income............................... -- -- -- 3,200,142 -- 3,200,142
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1994................ 3,444,530 34,445 47,704,383 3,215,294 (3,513,721) 47,440,401
Shares issued through exercise of
stock options.......................... 12,996 130 122,836 -- -- 122,966
Shares issued through dividend
reinvestment plan...................... 34,190 342 499,118 -- -- 499,460
Dividends ($1.38 per share).............. -- -- -- -- (4,775,819) (4,775,819)
Net income............................... -- -- -- 4,896,024 -- 4,896,024
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1995................ 3,491,716 34,917 48,326,337 8,111,318 (8,289,540) 48,183,032
Shares issued through exercise of
stock options.......................... 1,675 17 19,874 -- -- 19,891
Shares issued through dividend
reinvestment plan...................... 47,597 476 763,266 -- -- 763,742
Dividends ($0.37 per share).............. -- -- -- -- (1,310,166) (1,310,166)
Net income............................... -- -- -- 1,344,470 -- 1,344,470
--------- ------- ----------- ---------- ----------- ------------
Balances, March 31, 1996 (unaudited)....... 3,540,988 $35,410 $49,109,477 $9,455,788 $(9,599,706) $ 49,000,969
========= ======= =========== ========== =========== ============
</TABLE>

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

F-5
<PAGE> 70

PMC COMMERCIAL TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
JUNE 4, 1993
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 15,152 $ 3,200,142 $ 4,896,024 $ 1,185,124 $ 1,344,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of:
Government securities....................... -- (80,384) -- -- --
Discount on purchased loans................. -- (22,094) (26,460) (6,347) (7,074)
Deferred commitment fees.................... -- (166,200) (196,951) (55,968) (51,151)
Construction monitoring fees................ -- (39,946) (146,054) (32,342) (29,451)
Amortization of organization costs............ -- 8,040 8,040 2,010 2,011
Commitment fees collected..................... 97,010 1,295,419 546,211 107,466 261,512
Construction monitoring fees collected, net... -- 258,994 8,014 (27,449) 102,504
Changes in operating assets and liabilities:
Accrued interest receivable................. (40,181) (208,525) (201,548) (53,493) 26,018
Other assets................................ -- -- (26,382) -- (359,282)
Interest payable............................ -- -- 56,267 -- 171,654
Borrower advances........................... -- 2,346,162 (1,767,029) (74,657) 527,132
Due to affiliates........................... 24,557 159,966 660,263 61,440 198,841
Accounts payable............................ 187,115 (187,655) 14,175 -- (8,316)
------------ ------------ ------------ ----------- ------------
Net cash provided by operating activities......... 283,653 6,563,919 3,824,570 1,105,784 2,178,868
------------ ------------ ------------ ----------- ------------
Cash flows from investing activities:
Loans funded/purchased.......................... (3,215,660) (34,982,484) (31,711,230) (9,327,981) (4,830,062)
Principal collected............................. -- 4,861,525 4,991,896 2,341,401 1,015,308
Redemption (purchase) of Government
securities.................................... (4,919,616) 5,000,000 -- -- --
Investment in restricted cash................... -- -- -- -- (2,411,276)
------------ ------------ ------------ ----------- ------------
Net cash used in investing activities............. (8,135,276) (25,120,959) (26,719,334) (6,986,580) (6,226,030)
------------ ------------ ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common shares......... 46,388,443 5,175,000 582,107 -- 749,290
Proceeds from issuance of notes payable......... -- -- 9,130,000 -- 33,740,000
Payment of dividends............................ -- (2,480,062) (4,250,263) (1,033,359) (1,484,553)
Payment of issuance costs....................... (3,462,365) (362,250) -- -- --
Payment of principal on notes payable........... -- -- (1,210,000) -- (12,160,000)
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in) financing
activities...................................... 42,926,078 2,332,688 4,251,844 (1,033,359) 20,844,737
------------ ------------ ------------ ----------- ------------
Net (decrease) in cash and cash equivalents....... 35,074,455 (16,224,352) (18,642,920) (6,914,155) 16,797,575
Cash and cash equivalents, beginning of period.... -- 35,074,455 18,850,103 18,850,103 207,183
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents, end of period.......... $ 35,074,455 $ 18,850,103 $ 207,183 $11,935,948 $ 17,004,758
============ ============ ============ =========== ============
Supplemental disclosures:
Dividends reinvested............................ $ -- $ -- $ 40,319 $ -- $ 34,343
============ ============ ============ =========== ============
Dividends declared, not paid.................... $ -- $ 1,033,659 $ 1,518,896 $ 1,033,359 $ 1,310,166
============ ============ ============ =========== ============
Interest paid................................... $ -- $ 37,148 $ 165,436 $ -- $ 80,115
============ ============ ============ =========== ============
</TABLE>

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

F-6
<PAGE> 71

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
IS UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

General:

PMC Commercial Trust (the "Company") was organized on June 4, 1993, as a
Texas real estate investment trust created primarily to originate loans to small
business enterprises which are collateralized by first liens on real estate. The
shares of the Company are traded on the American Stock Exchange (Symbol "PCC").
The Company follows the accounting practices prescribed in Statement of Position
75-2 "Accounting Practices of Real Estate Investment Trusts." The Company's
principal investment objective is to obtain current income from interest
payments and other related fee income on collateralized business loans. The
Company's investment advisor is PMC Advisers, Inc. ("PMC Advisers" or the
"Investment Manager"), a wholly-owned subsidiary of PMC Capital, Inc. ("PMC
Capital"), a regulated investment company traded on the American Stock Exchange
(symbol "PMC"). The Company intends to maintain its qualified status as a real
estate investment trust ("REIT") for Federal income tax purposes.

Consolidated Financial Statements:

On March 7, 1996, PMC Commercial Receivable Limited Partnership, a Delaware
limited partnership ("PCR" or the "Partnership") and PMC Commercial Corp., a
Delaware corporation, were formed. PMC Commercial Corp. is the general partner
for PCR. The financial statements at March 31, 1996 and for the three months
then ended include the accounts of PMC Commercial Trust, PMC Commercial Corp.
and PCR. PMC Commercial Trust owns 100% of PMC Commercial Corp. and directly or
indirectly all of the partnership interests of PCR (see Note 10).

Use of Estimates in the Preparation of Financial Statements:

Loans Receivable:

Loans receivable are carried at their outstanding principal balance less
any discounts, deferred fees net of related costs, and loan loss reserves. A
loan loss reserve is established based on a determination, through an evaluation
of the recoverability of individual loans, by the Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. To date, no
loan loss reserves have been established. The determination of whether
significant doubt exists and whether a loan loss provision is necessary for each
loan requires judgment and considers the facts and circumstances existing at the
evaluation date. Changes to the facts and circumstances of the borrower, the
lodging industry and the economy may require the establishment of additional
loan loss reserves in proportion to the potential loss.

Deferred fee revenue is included in the carrying value of loans receivable
and consists of non-refundable fees less certain direct loan origination costs
which are being recognized over the life of the related loan as an adjustment of
yield.

Deferred Organization Costs:

Costs incurred by the Company in connection with its organization are being
amortized on a straight-line basis over a five year period.

F-7
<PAGE> 72

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes:

The Company intends to maintain its qualified status as a REIT under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to remain qualified as a REIT under the Code, the Company must elect to be
a REIT and must satisfy various requirements in each taxable year, including,
among others, limitations on share ownership, asset diversification, sources of
income, and distribution of income. By qualifying, the Company will not be
subject to Federal income taxes to the extent that it distributes at least 95%
of its taxable income in the fiscal year. Management of the Company believes it
has satisfied the various requirements to remain qualified as a REIT.

Interest Income:

Interest income is recorded on the accrual basis to the extent that such
amounts are deemed collectible. The Company's policy is to suspend the accrual
of interest income when a loan becomes 60 days delinquent.

Construction Monitoring Fees:

Fees related to the Company's construction monitoring activities are
recognized based on the percentage of project completion over the construction
period and is included in other income in the accompanying consolidated
statements of income.

Statement of Cash Flows:

The Company generally considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents for the
statement of cash flows. Cash and cash equivalents consists of cash equivalents
reflected in the Investments section of the balance sheet and cash reflected in
the Other Assets section of the balance sheet.

Per Share Data:

Net income per share is based on the weighted average number of common
shares of beneficial interest outstanding during the period.

Reclassification:

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

Statements of Financial Accounting Standards ("SFAS"):

In 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." These pronouncements are effective for fiscal years beginning
after December 15, 1994. These statements provide income recognition criteria on
loans and generally require creditors to value certain impaired and restructured
loans at the present value of the expected future cash flows, discounted at the
loan's effective interest rate, or at fair value of the collateral if the loan
is collateral dependent. Implementing SFAS No. 114 and SFAS No. 118 did not have
an effect on the Company's financial statements.

In 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) or to recognize compensation expense for
grants of stock, stock options, and other equity instruments to employees based
on fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earnings per
share

F-8
<PAGE> 73

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

as if the fair value based accounting prescribed by SFAS No. 123 has been
applied. The Company has elected to continue expense recognition pursuant to APB
No. 25. SFAS No. 123 is effective for fiscal years beginning after December 15,
1995.

Interim Financial Statements:

The accompanying consolidated financial statements of PMC Commercial Trust
and its subsidiaries as of and for the three months ended March 31, 1995 and
1996 is unaudited. In the opinion of the Company's management, the consolidated
financial statements reflect all adjustments necessary to present fairly the
financial position at March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1995 and 1996. These adjustments are
of a normal recurring nature.

NOTE 2. LOANS RECEIVABLE:

The Company primarily originates loans: (i) to small business enterprises
that exceed the net worth, asset, income, number of employee or other
limitations applicable to the Small Business Administration ("SBA") programs
utilized by PMC Capital or (ii) in excess of $1.1 million to small business
enterprises without regard to SBA eligibility requirements. Such loans are
collateralized by first liens on real estate and are subject to the Company's
underwriting criteria.

The principal amount of loans originated by the Company have not exceeded
70% of the lesser of fair value or cost of the real estate collateral unless
credit enhancements such as additional collateral or third party guarantees were
obtained. Loans originated or purchased by the Company typically provide
interest payments at fixed rates, although the Company may also originate and
purchase variable rate loans. Loans generally have maturities ranging from five
to 10 years. Most loans provide for scheduled amortization and often have a
balloon payment requirement. In most cases, borrowers are entitled to prepay all
or part of the principal amount subject to a prepayment penalty depending on the
terms of the loan.

During the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1996, the Company originated 38, 31 and 4 loans, respectively,
to corporations, partnerships or individuals. During the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, the Company funded
approximately $33.6, $31.7 and $4.8 million and collected commitment fees of
approximately $1.3 million, $546,000 and $262,000, respectively.

During the year ended December 31, 1994, the Company purchased loans with a
face value of $1,502,005, for $1,325,113 from the U.S. Government and/or its
agents. The discount on these loans is netted against loans receivable and is
being amortized over the remaining life of the loans on the interest method.
During the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1996, approximately $22,000, $26,000 and $7,000 of the discount has
been recognized as interest income, respectively.

At March 31, 1996, approximately 31% and 11% of the Company's loan
portfolio consisted of loans to borrowers in Texas and Maryland, respectively.
At December 31, 1995, approximately 32% and 12% of the Company's loan portfolio
consisted of loans to borrowers in Texas and Maryland, respectively.
Approximately 38%, 11% and 10% of the Company's loan portfolio as of December
31, 1994 consisted of loans to borrowers in Texas, Maryland and Pennsylvania,
respectively. No other state had a concentration of 10% or greater at March 31,
1996, December 31, 1995 or December 31, 1994. The Company's loan portfolio was
approximately 92%, 96% and 96% concentrated in the lodging industry at December
31, 1994 and 1995 and March 31, 1996, respectively.

In connection with the origination of a loan, the Company charges a
commitment fee. In accordance with SFAS No. 91, this non-refundable fee, less
the direct costs associated with the origination, is deferred and is included as
a reduction of the carrying value of loans receivable. These net fees are being
recognized as

F-9
<PAGE> 74

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income over the life of the related loan as an adjustment of yield. The Company
had $664,962, $974,971 and $968,699 in deferred commitment fees at December 31,
1994 and 1995 and March 31, 1996, respectively.

NOTE 3. DUE TO AFFILIATE:

The investments of the Company are managed by PMC Advisers. Pursuant to an
investment management agreement between the Company and the Investment Manager
(the "Investment Management Agreement"), the Company is obligated to pay to the
Investment Manager, quarterly in arrears, a base fee (the "Base Fee") consisting
of a quarterly servicing fee of 0.125% of the average quarterly value of all
assets (as defined in the Investment Management Agreement), representing on an
annual basis approximately 0.5% of the average annual value of all assets (as
defined in the Investment Management Agreement), and a quarterly advisory fee of
0.25% of the average quarterly value of all invested assets (as defined in the
Investment Management Agreement), representing on an annual basis approximately
1% of the average annual value of all invested assets (as defined in the
Investment Management Agreement). In addition, commencing January 1, 1994, for
each calendar year during which the Company's annual return on average equity
capital (as defined in the Investment Management Agreement) after deduction of
the Base Fee (the "Actual Return") exceeds 6.69% (the "Minimum Return"), the
Company will pay to the Investment Manager, as incentive compensation, an
additional advisory fee (the "Annual Fee") equal to the product determined by
multiplying the average annual value of all invested assets (as defined in the
Investment Management Agreement) by a percentage equal to the difference between
the Actual Return and the Minimum Return, up to a maximum of one percent (1%)
per annum. The Annual Fee will be earned only to the extent that the annual
return on average common equity capital (as defined in the Investment Management
Agreement) after deduction of the Base Fee and Annual Fee is at least equal to
the Minimum Return. All such advisory fees will be reduced to fifty percent with
respect to the value of Invested Assets that exceed common beneficiaries' equity
as a result of leverage or the issuance of preferred shares.

Pursuant to the Investment Management Agreement, the Company incurred fees
of $429,000, $1,189,000 and $356,000 based upon average value of all assets of
$48,993,937, $53,884,788 and $66,172,702 and average value of all invested
assets of $18,922,343, $46,756,497 and $60,669,030, for the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, respectively.
Pursuant to the Investment Management Agreement, the Company was not obligated
to pay advisory fees to the Investment Manager from inception through June 30,
1994. Of the amount of service and advisory fees paid or payable to the
Investment Manager as of December 31, 1994 and 1995 and March 31, 1996, $71,500,
$244,000 and $80,000, respectively, have been offset against commitment fees as
a direct cost of originating loans (see NOTE 2).

NOTE 4. BORROWER ADVANCES:

The Company finances projects during the construction phase. At December
31, 1994 and 1995 and March 31, 1996, the Company was in the process of funding
approximately $16.1 million, $15.9 million and $21.6 million in construction
projects, respectively, of which $11.4 million, $9.2 million and $11.7 million
in future fundings remain, respectively. As part of the monitoring process to
verify that the borrowers' cash equity is utilized for its intended purpose, the
Company receives funds from the borrowers and releases funds upon presentation
of appropriate supporting documentation. At December 31, 1994 and 1995 and March
31, 1996, the Company had $2.3 million, $579,000 and $1.1 million, respectively,
in funds held on behalf of borrowers which is included as a liability in the
accompanying consolidated balance sheet. The Company will use cash, cash
equivalents or available advances under its revolving credit facility to fund
these obligations.

F-10
<PAGE> 75

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. NET INCOME PER SHARE:

The weighted average number of common shares of beneficial interest
outstanding were 3,099,530, 3,430,009 and 3,451,091 for the periods ended
December 31, 1993, 1994 and 1995, respectively. The weighted average number of
common shares of beneficial interest outstanding were 3,444,530 and 3,519,612
for the three months ended March 31, 1995 and 1996, respectively. Net income per
share for the period ended December 31, 1993 is based on the weighted average
number of common shares of beneficial interest outstanding during the period
December 27, 1993 (commencement of operations) to December 31, 1993. The
weighted average number of common shares of beneficial interest outstanding
during the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1995 and 1996 were not affected by outstanding options, as such
options were anti-dilutive or immaterial (see NOTE 8).

NOTE 6. BENEFICIARIES' EQUITY:

During January 1994, the Company sold 345,000 additional common shares of
beneficial interest pursuant to the exercise by the underwriters of
over-allotment options relating to the initial public offering for net proceeds,
after underwriting discount, of approximately $4.8 million.

As part of the requirements of qualifying for REIT status under the Code,
the Company must distribute to its shareholders at least 95% of its income for
Federal income tax purposes ("Taxable Income") within established time
requirements of the Code. If these requirements are not met, the Company will be
subject to Federal income taxes and/or excise taxes. As a result of a timing
difference for the recognition of income with respect to fees collected at the
inception of originating loans, the Company's Taxable Income exceeds net income
in accordance with generally accepted accounting principals ("GAAP"). In order
not to incur any tax liability, the Company has declared or distributed the
required amount of taxable income as dividends to its shareholders. For Federal
income tax purposes, these dividends do not represent a return of capital.

NOTE 7. DIVIDEND REINVESTMENT PLAN:

The Company filed a registration statement with the Securities and Exchange
Commission to implement its dividend reinvestment plan. The registration
statement was declared effective by the Securities and Exchange Commission on
January 13, 1995. During the year ended December 31, 1995 and the three months
ended March 31, 1996, 34,190 and 47,597 shares were issued pursuant to the plan,
respectively.

F-11
<PAGE> 76

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. SHARE OPTION PLANS:

In accordance with the 1993 Employees Share Option Plan (the "Employees
Plan") and Trust Managers Share Option Plan (the "Trust Managers Plan"), adopted
by the Company, options to purchase up to 180,000 shares in aggregate can be
granted to directors, officers or key employees.

The grants outstanding at December 31, 1995 are:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE DATE OF GRANT EXERCISE DATE EXPIRATION DATE
- --------- -------- ----------------- ----------------- -----------------
<C> <C> <S> <C> <C>
4,000 $ 15.000 December 17, 1993 December 17, 1994 December 17, 1998
2,000 $ 14.625 May 10, 1994 May 10, 1995 May 10, 1999
7,665 $ 11.875 December 10, 1994 December 10, 1995 December 10, 1999
31,770 $ 11.875 December 10, 1994 December 10, 1996 December 10, 1999
2,000 $ 11.750 December 17, 1994 December 17, 1995 December 17, 1999
1,000 $ 14.125 May 10, 1995 May 10, 1996 May 10, 2000
2,000 $ 15.750 December 17, 1995 December 17, 1996 December 17, 2000
12,000 $ 15.750 December 15, 1995 January 15, 1997 December 15, 2000
4,940 $ 15.750 December 15, 1995 December 15, 1996 December 15, 2000
4,940 $ 15.750 December 15, 1995 December 15, 1997 December 15, 2000
</TABLE>

Employees Plan:

As of December 31, 1995, 86,020 share options had been granted, net of
shares cancelled in 1994 as detailed below. During December 1995, 12,996 shares
were exercised at $11.875. In addition, 11,109 shares expired or were cancelled
pursuant to the plan during the year ended December 31, 1995. The number of
shares exercisable at December 31, 1995 and March 31, 1996 was 7,665 and 5,990,
respectively.

In December 1994, the Board of Trust Managers allowed the officers and
employees holding existing options to elect to participate in an exchange of
options as of December 10, 1994, whereby the then-outstanding options could be
cancelled and, in lieu thereof, new options could be granted at an exchange rate
of 0.6 new shares per share previously granted. As a result, 39,400 options were
cancelled and 23,640 new options were issued.

Trust Managers Plan:

Only the trust managers who are not affiliated with PMC Capital or the
Investment Manager (the "Independent Trust Managers") are eligible to
participate in the Trust Managers Plan which provides for the grant of
nonqualified share options covering up to an aggregate of 20,000 shares. The
Trust Managers Plan is a nondiscretionary plan pursuant to which options to
purchase 2,000 shares are granted to each Independent Trust Manager on the date
such trust manager takes office. In addition, options to purchase 1,000 shares
are granted each year thereafter on the anniversary of the date the trust
manager took office so long as such trust manager is re-elected to serve as a
trust manager. Such options will be exercisable at the fair market value of the
shares on the date of grant. The options granted under the Trust Managers Plan
become exercisable one year after date of grant and expire if not exercised on
the earlier of (i) 30 days after the option holder no longer holds office as an
Independent Trust Manager for any reason or (ii) within five years after date of
grant. The number of shares exercisable at both December 31, 1995 and March 31,
1996 was 8,000.

NOTE 9. COMMITMENTS AND CONTINGENCIES:

Commitments to extend credit are agreements to lend to a customer provided
that the terms established in the contract are met. The Company had
approximately $7.1 million and $19.2 million of loan commitments outstanding to
6 corporations and 15 corporations, partnerships or individuals in the lodging
industry at

F-12
<PAGE> 77

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1995 and March 31, 1996, respectively. The weighted average
contractual interest rate on these loan commitments at December 31, 1995 and
March 31, 1996 was 10.95% and 10.57%, respectively. In addition, at December 31,
1995 and March 31, 1996 the Company had $6.5 million and $8.5 million of loan
commitments outstanding on 12 and 13 partially funded construction loans,
respectively, and approximately $1.9 million and $8.0 million of loan
commitments outstanding on SBA Section 504 program loans, respectively. The
above commitments are made in the ordinary course of the Company's business and
in management's opinion, are generally on the same terms as those to existing
borrowers. Commitments generally have fixed expiration dates and require payment
of a fee. Since some commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. To the extent the Company has available funds, an additional $15.2
million in commitments in the lodging industry issued by the Investment Manager
as of March 31, 1996, with a weighted average interest rate of 10.64% will be
funded by the Company. Pursuant to the Investment Management Agreement, should
the Company not have funds available for commitments, such commitments will be
referred to affiliated entities.

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

NOTE 10. NOTES PAYABLE:

During 1995, the Company completed an arrangement for a revolving credit
facility providing the Company with funds to originate loans collateralized by
commercial real estate. This credit facility provides to the Company up to the
lesser of $20 million or an amount equal to 50% of the value of the underlying
property collateralizing the borrowings. At December 31, 1995, the Company had
$7.9 million outstanding under the credit facility with availability of an
additional $12.1 million. The Company is charged interest on the balance
outstanding under the credit facility, at the option of the Company, at either
the prime rate of the lender less 50 basis points or 200 basis points over the
30, 60 or 90 day LIBOR. At December 31, 1995, the weighted average interest rate
on short-term borrowings under the revolving credit facility was 8.2%.

On March 12, 1996, a special purpose affiliate of the Company, PCR,
completed a private placement of $29,500,000 of its Fixed Rate Loan Backed
Notes, Series 1996-1 (the "Notes"). The Notes, issued at par, which mature in
2016 and bear interest at the rate of 6.72% per annum, are collateralized by
approximately $39.7 million of loans contributed by the Company to the
Partnership. In connection with this private placement, the Notes were given a
rating of "AA" by Duff and Phelps Credit Rating Co. The loans were originated or
purchased by the Company in accordance with the Company's lending strategy and
underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to the
Company or its assets in the event of nonpayment other than the loans
contributed to the Partnership and the restricted investments. The net proceeds
from this issuance of the Notes (approximately $27.1 million after giving effect
to costs of $500,000 and a $1.9 million deposit held by the trustee as
collateral) were distributed to the Company in accordance with its interest in
the Partnership. The Company used such proceeds to pay down all outstanding
borrowings under the Company's credit facility and intends to make additional
loans in accordance with its lending criteria.

F-13
<PAGE> 78

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS:

At December 31, 1995, the estimated fair values of the Company's financial
instruments are as follows:

<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Assets:
Loans receivable, net................................... $59,129,536 $60,505,163
Cash equivalents........................................ 173,679 173,679
Cash.................................................... 33,504 33,504
Other Assets............................................ 436,445 436,445
Liabilities:
Notes payable........................................... 7,920,000 7,920,000
Other liabilities....................................... 3,553,237 3,553,237
</TABLE>

(a) Loans receivable, net

The estimated fair value for all fixed rate loans is estimated by
discounting the estimated cash flows using the current rate at which similar
loans would be made to borrowers with similar credit ratings and maturities.

The impact of delinquent loans on the estimation of the fair values
described above is not considered to have a material effect and accordingly,
delinquent loans have been disregarded in the valuation methodologies employed.

(b) Cash equivalents

The carrying amount is a reasonable estimation of fair value.

(d) Other assets

The carrying amount is a reasonable estimation of fair value.

(e) Notes payable

The carrying amount is a reasonable estimation of fair value since amounts
due under the revolving credit facility are variable rate, short term
obligations.

(f) Other liabilities

The carrying amount is a reasonable estimation of fair value.

F-14
<PAGE> 79

PMC COMMERCIAL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED):

The following represents selected quarterly financial data of the Company;
which in the opinion of management, reflects adjustments (comprising only normal
recurring adjustments) necessary for fair presentation.

<TABLE>
<CAPTION>
1994
------------------------------------------
EARNINGS PER
REVENUES NET INCOME SHARE
---------- ---------- ------------
<S> <C> <C> <C>
First Quarter.................................. $ 490,596 $ 410,606 $ 0.12
Second Quarter................................. 778,500 665,075 0.19
Third Quarter.................................. 1,231,607 1,125,493 0.33
Fourth Quarter................................. 1,190,069 998,968 0.29
---------- ---------- ------
$3,690,772 $3,200,142 $ 0.93
========== ========== ======
</TABLE>

<TABLE>
<CAPTION>
1995
------------------------------------------
EARNINGS PER
REVENUES NET INCOME SHARE
---------- ---------- ------------
<S> <C> <C> <C>
First Quarter.................................. $1,421,548 $1,185,124 $ 0.34
Second Quarter................................. 1,414,668 1,128,282 0.33
Third Quarter.................................. 1,591,744 1,254,743 0.36
Fourth Quarter................................. 1,802,455 1,327,875 0.39
---------- ---------- ------
$6,230,415 $4,896,024 $ 1.42
========== ========== ======
</TABLE>

NOTE 13. SUBSEQUENT EVENT (UNAUDITED):

On April 23, 1996, the Company filed a registration statement on Form S-11
with the Securities and Exchange Commission to register for sale up to 2,360,000
common shares of beneficial interest. The registration is ongoing and there can
be no assurance that the registration statement will be declared effective or
that the Company will be able to sell any of the shares.

F-15
<PAGE> 80
================================================================================

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE COMPANY'S INVESTMENT MANAGER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................... 2
PROSPECTUS SUMMARY.......................... 3
RISK FACTORS................................ 7
THE COMPANY................................. 13
USE OF PROCEEDS............................. 14
PRICE RANGE OF COMMON SHARES................ 14
DIVIDENDS AND DISTRIBUTIONS POLICY.......... 15
CAPITALIZATION.............................. 17
SELECTED FINANCIAL DATA..................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................ 19
BUSINESS.................................... 25
MANAGEMENT.................................. 37
INVESTMENT MANAGER.......................... 42
PRINCIPAL SHAREHOLDERS...................... 46
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST.................................. 47
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND
OF THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS.................................... 49
FEDERAL INCOME TAX CONSIDERATIONS........... 50
ERISA CONSIDERATIONS........................ 57
UNDERWRITING................................ 59
LEGAL MATTERS............................... 60
EXPERTS..................................... 60
GLOSSARY.................................... 61
INDEX TO FINANCIAL STATEMENTS............... F-1
</TABLE>

================================================================================

2,000,000 SHARES

PMC
COMMERCIAL TRUST

COMMON SHARES OF
BENEFICIAL INTEREST

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

PROSPECTUS

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

OPPENHEIMER & CO., INC.

J.C. BRADFORD & CO.

FAHNESTOCK & CO. INC.

, 1996

================================================================================
<PAGE> 81

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD fee and the American Stock Exchange listing fee.

<TABLE>
<CAPTION>
ITEM AMOUNT
--------------------------------------------------------------------------- --------
<S> <C>
Registration Fee -- Securities and Exchange Commission..................... $ 13,733
NASD Fee................................................................... 4,483
American Stock Exchange Listing Fee........................................ 17,500
Transfer Agent's and Registrar's Fees*..................................... 1,000
Printing and Engraving Fees*............................................... 80,000
Legal Fees and Expenses (other than Blue Sky)*............................. 75,000
Accounting Fees and Expenses*.............................................. 45,000
Blue Sky Fees and Expenses (including fees of counsel)*.................... 35,000
Travel Expense*............................................................ 15,000
Miscellaneous Expenses*.................................................... 13,284
--------
Total............................................................ $300,000
========
</TABLE>

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

* Estimated

ITEM 31. SALES TO SPECIAL PARTIES

The Company is concurrently, by means of this registration statement,
offering 60,000 Common Shares directly to trust managers, officers and employees
of the Company and directors, officers and employees of PMC Advisers or of the
affiliates of PMC Advisers and certain associated persons and entities, at a
price equal to $ per share less underwriting discounts and commissions
payable with respect to the Common Shares offered to the public. The obligation
of such direct investors to purchase Common Shares in the Direct Offering is
contingent on the purchase of Common Shares by the Underwriters. There is no
minimum number of Common Shares to be purchased in the Direct Offering. As a
condition to the purchase of Common Shares in the Direct Offering, such
investors shall agree not to resell any Common Shares purchased by them for at
least 180 days from the date of this registration statement without the consent
of Oppenheimer & Co., Inc.

ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES

On June 7, 1993, the Company issued 100 Common Shares of beneficial
interest to each of Lance B. Rosemore, President, Chief Executive Officer and
Trust Manager of the Company, and Andrew S. Rosemore, Chairman of the Board of
Trust Managers, Chief Operating Officer and Trust Manager of the Company, for an
aggregate price of $2,790 pursuant to an exemption from registration under the
Securities Act of 1933, as amended provided by Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder.

ITEM 33. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS

Section 9.20 of the Texas Real Estate Investment Trust Act (the "Texas REIT
Act"), subject to procedures and limitations stated therein, allows the Company
to indemnify any person who was, is or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a trust
manager or officer against judgments, penalties (including excise and similar
taxes), fines, settlements and reasonable expenses actually incurred by the
person in connection with the proceeding. The Company is required by Section
9.20 to indemnify a trust manager or officer against reasonable expenses
incurred by him

II-1
<PAGE> 82

in connection with a proceeding in which he is a named defendant or respondent
because he is or was a trust manager or officer if he has been wholly
successful, on the merits or otherwise, in the defense of the proceeding. Under
the Texas REIT Act, trust managers and officers are not entitled to
indemnification if (i) the trust manager or officer is found liable to the real
estate investment trust or is found liable for willful or intentional misconduct
in the performance of his duty to the real estate investment trust and (ii) the
trust manager or officer was found liable for willful or intentional misconduct
in the performance of his duty to the real estate investment trust. The statute
provides that indemnification pursuant to its provisions is not exclusive of the
rights of indemnification to which a person may be entitled under any provision
of the Declaration of Trust, bylaws, agreements, or otherwise. In addition, the
Company has, pursuant to Section 15.10 of the Texas REIT Act, provided in its
Declaration of Trust that, to the fullest extent permitted by applicable law, a
trust manager of the Company shall not be liable for any act, omission, loss,
damage, or expense arising from the performance of his duty under the real
estate investment trust, except for his own willful misfeasance, malfeasance or
negligence.

The Company's Declaration of Trust and Bylaws provide for indemnification
by the Company of its trust managers and officers to the fullest extent
permitted by the Texas REIT Act. In addition, the Company's Bylaws provide that
the Company may pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager or
officer made a party to a proceeding by reason of his status as a trust manager
or officer provided that (i) the trust managers have consented to the
advancement of expenses (which consent shall not be unreasonably withheld) and
(ii) the Company shall have received (a) a written affirmation by the trust
manager or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company under the Texas REIT Act
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met or it is ultimately determined that indemnification of
the trust manager against expenses incurred by him in connection with that
proceeding is prohibited by Section 9.20 of the Texas REIT Act.

The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.

ITEM 34. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED

Not applicable.

ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS

a. Financial Statements

Report of Independent Accountants

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1994 and 1995 and March
31, 1996

Consolidated Statements of Income for the period June 4, 1993 (date of
inception) to December 31, 1993, the years ended December 31, 1994 and
1995, and the three months ended March 31, 1995 and 1996

Consolidated Statements of Beneficiaries' Equity for the period June 4,
1993 (date of inception) to December 31, 1993, the years ended December
31, 1994 and 1995, and the three months ended March 31, 1996

Consolidated Statements of Cash Flows for the period June 4, 1993 (date
of inception) to December 31, 1993, the years ended December 31, 1994
and 1995, and the three months ended March 31, 1995 and 1996

Notes to Consolidated Financial Statements

II-2
<PAGE> 83

b. Schedules to Financial Statements

None.

c. Exhibits

<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Declaration of Trust (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 3.1 and incorporated herein by reference)
3.1(a) -- Amendment No. 1 to Declaration of Trust (previously filed with the
Company's Amendment No. 1 on Form S-11 filed with the Securities and
Exchange Commission on September 30, 1993, as amended (Registration
No. 33-65010), as Exhibit No. 3.1(a) and incorporated herein by
reference)
3.1(b) -- Amendment No. 2 to Declaration of Trust (previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 as Exhibit No. 3.1(b) and incorporated herein by reference)
3.2 -- Bylaws (previously filed with the Company's Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on June
25, 1993, as amended (Registration No. 33-65010), as Exhibit No. 3.2
and incorporated herein by reference)
4. -- Form of Share Certificate*
5. -- Opinion of Winstead Sechrest & Minick P.C., regarding the legality of
the Common Shares*
8. -- Opinion of Winstead Sechrest & Minick P.C., regarding tax matters*
10.1 -- Investment Management Agreement between the Company and PMC Advisers,
Inc.*
10.2 -- 1993 Employee Share Option Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.2 and incorporated herein by reference)
10.3 -- 1993 Trust Manager Share Option Plan (previously filed with the
Company's Registration Statement on Form S-11 filed with the
Securities and Exchange Commission on June 25, 1993, as amended
(Registration No. 33-65010), as Exhibit No. 10.3 and incorporated
herein by reference)
10.4 -- Dividend Reinvestment Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.4 and incorporated herein by reference)
10.5 -- Loan Origination Agreement (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.5 and incorporated herein by reference)
10.6 -- Revolving Credit Facility (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.6 and incorporated herein by reference)
10.7 -- Structured Financing (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.7 and incorporated herein by reference)
</TABLE>

II-3
<PAGE> 84

<TABLE>
<C> <S>
10.8 -- Marketing/Reserve Agreement between U.S. Franchise Systems, Inc. and
the Company*
23.1 -- Consent of Coopers & Lybrand L.L.P.**
23.2 -- Consent of Winstead Sechrest & Minick P.C. Included in responses to
items 5 and 8*
24. -- Powers of attorney of the persons signing this registration
statement*
27. -- Financial Data Schedule*
</TABLE>

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

* Previously filed

** Filed herewith

ITEM 36. UNDERTAKINGS

(a) Undertaking related to acceleration of effectiveness:

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(b) Undertaking related to equity offerings of non-reporting registrants:

The undersigned registrant hereby undertakes to provide to the
representatives of the underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by the representatives of the underwriters to permit prompt delivery to
each purchaser.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 85

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Amendment No. 2 to Form S-11 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on June 19, 1996.

PMC COMMERCIAL TRUST

By: /s/ Lance B. Rosemore
------------------------------------
Lance B. Rosemore, President

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 has been signed by the following persons in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------------------
<S> <C> <C>
/s/ Dr. ANDREW S. ROSEMORE Chairman of the Board, Chief June 19, 1996
- --------------------------------------------- Operating Officer and
Dr. Andrew S. Rosemore Trust Manager

/s/ LANCE B. ROSEMORE President, Chief Executive June 19, 1996
- --------------------------------------------- Officer, Secretary and
Lance B. Rosemore Trust Manager (principal
executive officer)

/s/ BARRY N. BERLIN Chief Financial Officer June 19, 1996
- --------------------------------------------- (principal financial and
Barry N. Berlin accounting officer)

/s/ NATHAN G. COHEN* Trust Manager June 19, 1996
- ---------------------------------------------
Nathan G. Cohen

/s/ DR. MARTHA R. GREENBERG* Trust Manager June 19, 1996
- ---------------------------------------------
Dr. Martha R. Greenberg

/s/ ROY H. GREENBERG* Trust Manager June 19, 1996
- ---------------------------------------------
Roy H. Greenberg

/s/ IRVING MUNN* Trust Manager June 19, 1996
- ---------------------------------------------
Irving Munn

/s/ DR. IRA SILVER* Trust Manager June 19, 1996
- ---------------------------------------------
Dr. Ira Silver

*By: /s/ LANCE B. ROSEMORE
- ---------------------------------------------
Lance B. Rosemore
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 86

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ ----
<C> <S> <C>
1.1 -- Underwriting Agreement*
3.1 -- Declaration of Trust (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 3.1 and incorporated herein by reference)
3.1(a) -- Amendment No. 1 to Declaration of Trust (previously filed with the
Company's Amendment No. 1 on Form S-11 filed with the Securities and
Exchange Commission on September 30, 1993, as amended (Registration
No. 33-65010), as Exhibit No. 3.1(a) and incorporated herein by
reference)
3.1(b) -- Amendment No. 2 to Declaration of Trust (previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 as Exhibit No. 3.1(b) and incorporated herein by reference)
3.2 -- Bylaws (previously filed with the Company's Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on June
25, 1993, as amended (Registration No. 33-65910), as Exhibit No. 3.2
and incorporated herein by reference)
4. -- Form of Share Certificate*
5. -- Opinion of Winstead Sechrest & Minick P.C., regarding the legality of
the Common Shares*
8. -- Opinion of Winstead Sechrest & Minick P.C., regarding tax matters*
10.1 -- Investment Management Agreement between the Company and PMC Advisers,
Inc.*
10.2 -- 1993 Employee Share Option Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.2 and incorporated herein by reference)
10.3 -- 1993 Trust Manager Share Option Plan (previously filed with the
Company's Registration Statement on Form S-11 filed with the
Securities and Exchange Commission on June 25, 1993, as amended
(Registration No. 33-65910), as Exhibit No. 10.3 and incorporated
herein by reference)
10.4 -- Dividend Reinvestment Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.4 and incorporated herein by reference)
10.5 -- Loan Origination Agreement (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.5 and incorporated herein by reference)
10.6 -- Revolving Credit Facility (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.6 and incorporated herein by reference)
10.7 -- Structured Financing (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.7 and incorporated herein by reference)
</TABLE>

<PAGE> 87

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ ----
<C> <S> <C>
10.8 -- Marketing/Reserve Agreement between U.S. Franchise Systems, Inc. and
the Company*
23.1 -- Consent of Coopers & Lybrand L.L.P.**
23.2 -- Consent of Winstead Sechrest & Minick P.C. Included in responses to
items 5 and 8*
24. -- Powers of attorney of the persons signing this registration
statement*
27. -- Financial Data Schedule*
</TABLE>

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

* Previously filed.

** Filed herewith.

<PAGE> 1
Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in Amendment No. 2 to the Registration Statement on
Form S-11 (File No. 333-2757) of our report dated March 20, 1996, on our audits
of the financial statements of PMC Commercial Trust. We also consent to the
reference to our firm under the caption "Experts."

COOPERS & LYBRAND L.L.P.

Dallas, Texas
June 19, 1996