PMC COMMERCIAL TRUST /TX, S-11, 1996-04-23

PMC COMMERCIAL TRUST /TX
S-11, 1996-04-23
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1

As filed with the Securities and Exchange Commission on April __, 1996
File No. 333-_____

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

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 75248
(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:

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
=============================================================================================================
PROPOSED PROPOSED
TITLE OF AMOUNT MAXIMUM MAXIMUM
SECURITIES BEING BEING OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest, 2,360,000 $16.875 $39,825,000 $13,733
$.01 par value . . shares
=============================================================================================================
</TABLE>

(1) Includes 300,000 Common Shares of Beneficial Interest which may be
purchased by the Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) based upon the average of the high and low
reported prices for the Common Shares on the American Stock Exchange on
April 22, 1996.

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
--- ------------ ----------------------
<S> <C> <C>
1 Forepart of Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus

2 Inside Front and Outside Back Cover Pages of Inside Front Cover Page and Outside Back
Prospectus Cover Page

3 Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors;
Earnings to Fixed Charges Business

4 Determination of Offering Price Outside Front Cover Page; Underwriting

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 Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 Federal Income Tax Considerations
Holders

17 Market Price of and Dividends on the Outside Front Cover Page; Price Range of
Registrant's Common Equity and Related Common Shares; Dividends and
Stockholder Matters Distributions Policy; Description of
Shares of Beneficial Interest

18 Description of Registrant's Securities Description of Shares of Beneficial
Interest
</TABLE>

- i -
<PAGE> 3
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Prospectus
--- ------------ ----------------------
<S> <C> <C>
19 Legal Proceedings Business

20 Security Ownership of Certain Beneficial Owners Principal Shareholders
and Management

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 Business; Investment Manager
Registrant's Investments

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 Not applicable
Indemnification for Securities Act Liabilities

</TABLE>

- ii -
<PAGE> 4

***************************************************************************
* *
* 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 APRIL 23, 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 adviser 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 ____% of the issued and
outstanding Common Shares.

The Common Shares are listed on the American Stock Exchange under the
symbol "PCC." On ___________, 1996, the closing sales price of the Common
Shares as reported on the American Stock Exchange was $___ per share. See
"Price Range of the Common Shares." The Company has paid, and intends to
continue to pay, quarterly dividends to its shareholders. On April 15, 1996,
the Company paid a quarterly dividend of $0.37 per Common Share. See
"Dividends and Distributions Policy."

SEE "RISK FACTORS" 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 Public Underwriting Discount(1) Proceeds to Company(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . . . . . $_____ $_____ $_____
Total(3) . . . . . . . . . $_____ $_____ $_____
=======================================================================================================================
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $_______
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 April ___, 1996
<PAGE> 5
IN CONNECTION WITH THIS 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 and copied 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 will be 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 will receive annual reports containing audited financial statements with
a report thereon from the Company's independent certified public accountants,
and quarterly reports containing unaudited financial information for each of
the first three quarters of each fiscal year.
<PAGE> 6
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 December 31, 1995, 96% of the Company's loan portfolio consisted of loans
for the acquisition and construction of hotels, and Days Inn, Holiday Inn and
Best Western franchisees accounted for 21.7%, 17.7% and 10.1%, 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. In addition, 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 businesses.

From commencement of operations through December 31, 1995, the Company
originated or purchased 72 loans in an aggregate principal amount funded of
approximately $70 million. At December 31, 1995, 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 real estate 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 Small Business Administration ("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.

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<PAGE> 7
over time and now exceed the limitations set for SBA approved loan programs.
These borrowers generally have greater 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 relationships with
national hotel and motel franchises to secure a consistent flow of lending
opportunities. For example, on April 12, 1996, the Company entered into a
marketing agreement with U.S. Franchise Systems, Inc. ("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. 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.

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:

o Substantially all of the Company's outstanding loans were to
businesses in the lodging industry (96% at December 31, 1995).

o 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.

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

o 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.

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

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

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

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

-2-
<PAGE> 8
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 is derived from the audited financial statements and may
not be indicative of future operating results of the Company.

Period From
June 4, 1993
(date of inception) Years Ended December 31,
to -------------------------
December 31, 1993 1994 1995
----------------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenues:
Interest income-loans . . . . $ 3 $ 2,289 $ 5,610
Interest and dividends-
other investments . . . . . $ 13 $ 1,222 $ 325
Other income . . . . . . . . $ -- $ 180 $ 295
Total revenues . . . . . . . $ 16 $ 3,691 $ 6,230
Expenses:
Advisory and servicing
fees, net . . . . . . . . $ -- (3) $ 357 $ 946
Interest . . . . . . . . . . $ -- $ 37 $ 221
Other . . . . . . . . . . . . $ 1 $ 97 $ 167
Total expenses . . . . . . . $ 1 $ 491 $ 1,334
Net income . . . . . . . . . . . $ 15 $ 3,200 $ 4,896
Weighted average common
shares outstanding . . . . . 3,099,530 3,430,009 3,451,091
Net income per
common share . . . . . . . . $ 0.01 $ 0.93 $ 1.42
Dividends per common share . . . $ -- (3) $ 1.02 $ 1.38
Return on average assets(1) . . . -- (3) 6.5% 8.8%
Return on average common
beneficiaries' equity(2) . . -- (3) 6.9% 10.2%

</TABLE>

<TABLE>
<CAPTION>
December 31,
--------------------------------------------
At End of Period 1993 1994 1995
---------------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Loans receivable . . . . . . . . . . $ 3,119 $ 32,694 $ 59,130
Total assets . . . . . . . . . . . . $ 43,153 $ 51,785 $ 59,797
Notes payable . . . . . . . . . . . . $ -- $ -- $ 7,920
Beneficiaries' equity . . . . . . . $ 42,941 $ 47,440 $ 48,183
Total liabilities and
beneficiaries' equity . . . $ 43,153 $ 51,785 $ 59,797
</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, divided by
five.
(3) Not applicable due to initial period of the Company's operations
which commenced on December 28, 1993.

-3-
<PAGE> 9

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) . . . . . . . . . . . . . . . . . . . _____ Common Shares

Use of Proceeds . . . . . . . . . . . . . . . . . . . . The net proceeds to the Company are estimated to
be approximately $_____. Initially, substantially
all of the net proceeds of the Offering will be invested
in temporary investments of the types described under
"Business--Investment Policies." 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 ______ 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 and $1.38 for 1994 and 1995,
respectively. On April 15, 1996, the Company paid a dividend of $0.37 per
Common Share to holders of record on March 29, 1996. 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 ending 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."

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<PAGE> 10
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 December 31, 1995, 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 business of the Company. Additionally,
loans to businesses located in Texas and Maryland currently comprise 32% and
12%, 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 results of operations.

As of December 31, 1995, Days Inn, Holiday Inn and Best Western
franchisees accounted for 21.7%, 17.7% and 10.1%, 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
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 may
be less than the principal amount of such loan after payment and collection of
foreclosure expenses. 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. See "Business--Loan Originations and
Underwriting" 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

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<PAGE> 11
Investment Manager's Executive Vice President and Chief Operating Officer. The
loss or interruption of the services of these persons could have a material
adverse effect on the Company. 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. Although management of the Company believes that the
Company can obtain the services of third party investment advisers or hire
sufficient personnel to internally manage the Company's investments in the
event that the Investment Management Agreement is not renewed, no assurance can
be given that the Company could obtain alternative investment management
services on similar terms or that the same quality of portfolio could be
maintained. The Company's inability to find an alternative investment manager
on similar terms may adversely influence the decision of the Independent Trust
Managers with respect to the renewal of the Investment Management Agreement.
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 "--Investment Policies."

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
investment company 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"), to the extent
that the Company has funds available to make a proposed loan, 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 SBIC
loan programs utilized by PMC 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

-6-
<PAGE> 12
Origination Agreement. See "Business--Loan Originations and Underwriting."
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.

The fee of the Investment Manager is based on the value of the
Company's total 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 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 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

-7-
<PAGE> 13
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 whether the Company would ever be classified as one.
See "Federal Income Tax Considerations--Other Taxation."

LEVERAGE

The Company has established a revolving credit facility, completed a
private placement of the Notes through the Partnership and may issue Preferred
Shares 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 impact the
Company's results of operations and the Company's ability to maintain its
qualification as a REIT for Federal tax purposes. See "Business--Investment
Policies" 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 and realize income on the
property. 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

-8-
<PAGE> 14
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.

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. 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

-9-
<PAGE> 15
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. 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 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
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this 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.

-10-
<PAGE> 16
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 investments of the Company are managed by PMC Advisers, a
wholly-owned subsidiary of PMC Capital, Inc.. 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. These borrowers generally 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
relationships with national hotel and motel franchises 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

-11-
<PAGE> 17
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.

USE OF PROCEEDS

Based upon an assumed offering price of $___ per share, the net
proceeds to the Company from the Offering (after deducting estimated offering
expenses) are estimated to be approximately $_________ ($____ if the
Underwriters' over-allotment option is exercised in full). Substantially all
of the net proceeds of the Offering will initially be invested in temporary
investments of the types described under "Business--Investment Policies." 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). 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 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 April 22, 1996) . . . $17.38 $16.75
</TABLE>

-12-
<PAGE> 18
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.
Dividends are generally paid quarterly toward the middle of January, April,
July and October of each year. 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.

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, New York, New York
(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.

-13-
<PAGE> 19
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 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. All correspondence concerning the Plan should be
directed to the Company.

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.

-14-
<PAGE> 20
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1995, and of the Company and its subsidiaries on a pro forma basis
to give effect to the sale of the Notes in March 1996 and the 2,000,000 Common
Shares offered hereby. 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 December 31, 1995
-----------------------
Actual Pro Forma
----------- --------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Short-term debt . . . . . . . . . . . . . . . . . . . . . . $ 7,920 $ --
======= ========

Long-term debt . . . . . . . . . . . . . . . . . . . . . . $ -- $ --

Fixed rate loan backed notes(1) . . . . . . . . . . . . . . -- 29,500

Beneficiaries' equity:

Common Shares, $.01 par value; 100,000,000 shares
authorized; 3,491,716 outstanding(2) . . . . . . . . 35 --------

Additional paid-in capital . . . . . . . . . . . . . . . . 48,326
--------
Cumulative net income . . . . . . . . . . . . . . . . . . . 8,111 8,111

Cumulative dividends . . . . . . . . . . . . . . . . . . . (8,289) (8,289)

Total beneficiaries' equity . . . . . . . . . . . . . . . . 48,183
------- --------

Total capitalization . . . . . . . . . . . . . . . . . $48,183 $
======= ========
</TABLE>

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

(1) On March 12, 1996, a special purpose affiliate of the Company, PMC
Commercial Receivable Limited Partnership, completed a private placement
of the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(2) Does not include (i) up to 300,000 shares reserved for issuance upon
exercise of the Underwriters' over-allotment option, and (ii) 60,000 shares
reserved for issuance pursuant to the Direct Offering. See "Underwriting."

-15-
<PAGE> 21
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
and for the years ended December 31, 1994 and December 31, 1995. 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 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.

Period From
June 4, 1993
(date of inception) Years Ended December 31,
to --------------------------
December 31, 1993 1994 1995
----------------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenues:
Interest income-loans . . . . $ 3 $ 2,289 $ 5,610
Interest and dividends-
other investments . . . . . $ 13 $ 1,222 $ 325
Other income . . . . . . . . $ -- $ 180 $ 295
Total revenues . . . . . . . $ 16 $ 3,691 $ 6,230
Expenses:
Advisory and servicing
fees, net . . . . . . . . $ -- (3) $ 357 $ 946
Interest . . . . . . . . . . $ -- $ 37 $ 221
Other . . . . . . . . . . . . $ 1 $ 97 $ 167
Total expenses . . . . . . . $ 1 $ 491 $ 1,334
Net income . . . . . . . . . . . $ 15 $ 3,200 $ 4,896
Weighted average common
shares outstanding . . . . . 3,099,530 3,430,009 3,451,091
Net income per
common share . . . . . . . . $ 0.01 $ 0.93 $ 1.42
Dividends per common share . . . $ -- (3) $ 1.02 $ 1.38
Return on average assets(1) . . . -- (3) 6.5% 8.8%
Return on average common
beneficiaries' equity(2) . . -- (3) 6.9% 10.2%

</TABLE>

<TABLE>
<CAPTION>
December 31,
-----------------------------------------
At End of Period 1993 1994 1995
---------------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Loans receivable . . . . . . . . . . $ 3,119 $ 32,694 $ 59,130
Total assets . . . . . . . . . . . . $ 43,153 $ 51,785 $ 59,797
Notes payable . . . . . . . . . . . . $ -- $ -- $ 7,920
Beneficiaries' equity . . . . . . . $ 42,941 $ 47,440 $ 48,183
Total liabilities and
beneficiaries' equity . . . $ 43,153 $ 51,785 $ 59,797

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

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<PAGE> 22
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 over-allotment options.

During the year ended December 31, 1995, the Company originated and funded
$31.7 million of loans, all to corporations, partnerships and individuals
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 (92%) were to
corporations and individuals operating in the lodging industry. As of December
31, 1995, the total portfolio outstanding was $60.2 million ($59.1 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. Each of the loans is collateralized by first liens on the property
acquired and is guaranteed, for all but one loan, by the principals of the
businesses financed. Included in the funded loans are $1.7 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 require the establishment of
significant additional 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

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.

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<PAGE> 23
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. 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 $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 offset against commitment fees as a direct cost of
originating loans. Investment management fees were $429,000 for the year ended
December 31, 1994. The advisory fees for the six month period ended June 30,
1994 were waived by 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 offset against commitment fees as a direct cost of
originating loans. The increase in investment management fees of $760,000
(prior to offsetting direct costs of originating loans),

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<PAGE> 24
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 new
dividend reinvestment plan and annual reports, and (iii) the cost of
registration 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 during the year ended December 31, 1995
(approximately $51,000). 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 borrowers 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 borrowers advances. During 1995, many of
the construction projects were significantly completed, with the result being a
net reduction in outstanding borrowers advances at December 31, 1995.
Offsetting the decrease in borrowers advances were increases in net income and
due to affiliates. 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

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<PAGE> 25
time. During 1994, most of the amounts loaned related to the acquisition or
refinance of lodging properties.

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 over-allotments of 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 December 31, 1995, the Company had $207,000 of cash and cash equivalents
and approximately $15.5 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 December 31, 1995, the Company had
$7.9 million outstanding under the credit facility and a loan availability of
an additional $12.1 million. 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

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<PAGE> 26
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 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

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<PAGE> 27
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.

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<PAGE> 28
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. These borrowers generally 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 franchises 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. 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.

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<PAGE> 29
LOAN ORIGINATIONS AND UNDERWRITING

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 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.

Prospective borrowers are generally evaluated based on whether they (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 December 31, 1995,
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.

As of December 31, 1995, 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 franchisor provides training, assists in site
selection and provides credit reviews of the franchisee. The Company also
conducts its own independent credit analysis prior to originating a loan. 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 December 31, 1995, 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. Accordingly, to the extent the Company has
funds available, 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

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<PAGE> 30
Section 7(a) or small business investment company ("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. 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.

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 (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.

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<PAGE> 31
LOAN PORTFOLIO CHARACTERISTICS

The Company's loan portfolio has the following characteristics:

a. At December 31, 1995, the Company had 63 loans outstanding with an
aggregate principal amount outstanding of $60,233,000.

b. At December 31, 1995, 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
December 31, 1995). 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 December 31, 1995, the outstanding principal amounts of the loans
used by borrowers to acquire real estate and/or construct improvements
thereon (the "Real Estate Loans") ranged from approximately $300,000
to $2.5 million and the outstanding principal amounts of the related
loans used to acquire furniture, fixtures and equipment for certain of
such real estate (the "FFE Loans") ranged from approximately $58,000
to $315,000.

f. All Real Estate Loans are secured by first liens on business real
property. Each of 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.

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

h. 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 real estate collateral. When necessary, credit
enhancements, such as additional collateral or third party guarantees,
are obtained to assure a maximum of 70% loan to value ratio.

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

j. All originated loans have original maturities ranging from five to 20
years which may be extended by mutual agreement of the Company,
subject to certain conditions, and the borrower until the loan is
fully amortized if the original maturity date of the loan is prior to
the stated maturity.

k. Originated loans provide for scheduled amortization (ranging from five
to 20 years). Substantially all Real Estate Loans have balloon
payment requirements (which may be extended at maturity upon agreement
by the Company) and entitle borrowers to prepay all or part of the
principal amount, subject to a prepayment penalty.

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<PAGE> 32
l. At December 31, 1995, the weighted average maturity for the Company's
portfolio of loans was approximately six years.

LOAN PORTFOLIO

From inception through December 31, 1995, the Company originated or
purchased 72 loans in an aggregate principal amount of approximately $70
million. The weighted average interest rate for the Company's portfolio of
loans outstanding as of December 31, 1995 was 11.2%.

All loans are paying as agreed. From inception through December 31, 1995,
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 and the years ended
December 31, 1994 and 1995 were 11.50%, 11.05% and 11.42%, 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:

Interest Rates on Originated Loans
(in thousands)
<TABLE>
<CAPTION>
Period Originated Interest Rates
----------------- ------------------------------------------------------------
Total
-----
10.50-10.99% 11.00-11.49% 11.50-11.99% 12.00-12.25%
------------ ------------ ------------ ------------
<S> <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
--------- --------- -------- -------- -------

Total $ 22,743 $ 12,732 $ 32,758 $ 352 $68,585
========= ========= ======== ======== =======

Percentage of Portfolio 33.2% 18.6% 47.7% 0.5%
========= ========= ======== ========

</TABLE>

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

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

All loans originated by the Company are guaranteed by the principal(s)
of the borrowers and have original maturities ranging from five to 20 years,
which may be extended by the mutual consent of the Company, subject to certain
conditions, and 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 December 31, 1995:

<TABLE>
<CAPTION>
Aggregate
Principal
Number Outstanding Percent of
Amortization Term of Loans (in thousands) Portfolio
----------------- -------- -------------- ---------
<S> <C> <C> <C>
10 years or fewer 7 $ 2,328 3.9%
11 to 20 years 54 56,426 93.7%
21 to 30 years 2 1,479 2.4%
----- --------- -------
Total 63 $ 60,233 100.0%
===== ========= =======
</TABLE>

-27-
<PAGE> 33
The Company lends primarily to borrowers involved in the lodging
industry. As of December 31, 1995, 96% of the Company's loan portfolio
consisted of loans for the acquisition and construction of hotels. As of
December 31, 1995, Days Inn, Holiday Inn and Best Western franchisees accounted
for 21.7%, 17.7% and 10.1%, respectively, of the Company's outstanding loan
portfolio.

The following table sets forth a breakdown of the Company's loan
portfolio at December 31, 1995 to borrowers involved in the hotel (national
franchises and independent hotels) and commercial real estate:

<TABLE>
<CAPTION>
Principal Percentage
No. of Outstanding of
Loans (in thousands) Portfolio
----- -------------- ---------
<S> <C> <C> <C>
Days Inn . . . . . . . . . . . . . . . 11 $ 13,078 21.7%

Holiday Inn(1) . . . . . . . . . . . . 12 10,658 17.7%

Best Western(2) . . . . . . . . . . . . 7 6,083 10.1%

Ramada Inn . . . . . . . . . . . . . . 4 5,799 9.6%

Comfort Inn(3) . . . . . . . . . . . . 7 4,378 7.3%

Hampton Inn(4) . . . . . . . . . . . . 4 3,528 5.8%

Howard Johnsons . . . . . . . . . . . . 2 3,239 5.4%

Quality Inn(5) . . . . . . . . . . . . 3 2,420 4.0%

Econolodge . . . . . . . . . . . . . . 1 1,601 2.7%

Super 8 . . . . . . . . . . . . . . . . 3 1,519 2.5%

Knights Inn . . . . . . . . . . . . . . 1 645 1.1%
------- ---------- ------

Total of Franchise Affiliates . . . . . 55 52,948 87.9%

Independent Hotels . . . . . . . . . . 6 4,718 7.8%

Commercial Real Estate . . . . . . . . 2 2,567 4.3%
------- ---------- ------

Total . . . . . . . . . . . . . . . . . 63 $ 60,233 100.0%
======= ========== ======
</TABLE>

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

(1) Represents (i) five loans originated for Holiday Inn franchises with
$5,921,633 principal outstanding which represents 9.8% of the loan
portfolio, including one FFE Loan of $192,416, and (ii) seven loans
originated for Holiday Inn Express franchises with $4,736,347
principal outstanding which represents 7.8% of the loan portfolio,
including one FFE Loan of $58,248.
(2) Includes one SBA Section 504 program loan of $680,000 and one FFE Loan
of $314,524.
(3) Represents (i) six loans originated for Comfort Inn franchises with
$3,398,047 principal outstanding which represents 5.6% of the loan
portfolio, including one SBA Section 504 program loan of $405,296 and
one FFE Loan of $109,983, and (ii) one loan originated for a Comfort
Inn Suite franchise with $979,845 principal outstanding which
represents 1.6% of the loan portfolio.
(4) Includes one FFE Loan of $82,964.
(5) Includes one SBA Section 504 program loan of $567,628.

-28-
<PAGE> 34
The following table sets forth the aggregate amount of loans
originated or purchased for each quarter since inception to December 31, 1995:

Loans Originated or Purchased By Quarter(1)
(in thousands)

<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
First Quarter . . . . . . . . . . . $ 7,039 $ 9,328

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
(date of
inception) to
December 31, Years Ended December 31,
1993(1) 1994 1995
-------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Loans receivable - beginning of period . . . . . . . $ -- $ 3,119 $32,694

Loans originated or purchased . . . . . . . . . . . . 3,216 34,983 31,711

Loan repayments(2) . . . . . . . . . . . . . . . . . -- (4,862) (4,992)

Other adjustments(3) . . . . . . . . . . . . . . . . (97) (546) (283)
------- ------- -------
Loans receivable - end of period . . . . . . . . . . $ 3,119 $32,694 $59,130
======= ======= =======

</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 accounted for in accordance with SFAS No. 91.

LENDING ACTIVITIES

During the years ended December 31, 1994 and 1995, the Company
originated loans to 38 and 31 corporations, partnerships or individuals for
approximately $33.6 and $31.7 million and collected commitment fees of
approximately $1.3 million and $546,000, 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

-29-
<PAGE> 35
loans. During the years ended December 31, 1994 and 1995, approximately
$22,000 and $26,000, respectively, of the discount was recognized as interest
income. No loans were purchased during the year ended December 31, 1995.

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. At
December 31, 1994, approximately 38%, 11% and 10% of the Company's loan
portfolio consisted of loans to borrowers in Texas, Maryland and Pennsylvania,
respectively. The Company's loan portfolio was approximately 92% and 96%
concentrated in the lodging industry at December 31, 1994 and 1995,
respectively.

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 and $974,971 in net unamortized deferred commitment
fees at December 31, 1994 and 1995, 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 December 31, 1995. 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 generally follows a
practice of discontinuing the accrual of interest income on loans which are in
arrears as to interest payments for a period in excess of 60 days. 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 December 31, 1995, no loan loss reserve had been
established.

SBA SECTION 504 PROGRAM

The Company participates as a private lender in the SBA Section 504
program (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, 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 from a private lender such as the Company, by the
principals of the small business enterprise being assisted. The Company
generally requires at least 15%

-30-
<PAGE> 36
of the equity in a project to be contributed by the principals of the borrower.
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 the previous two years. Financing pursuant to
the Program cannot be used for working capital or inventory, consolidating or
repaying debt or financing a plant not located in the U.S. or its possessions.
As of December 31, 1995, the Company had $1,735,888 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.

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

-31-
<PAGE> 37
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.

BORROWER ADVANCES

The Company finances some projects during the construction phase. At
December 31, 1995, the Company was in the process of monitoring approximately
$15.9 million in total commitments for construction projects, of which $9.2
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
escrows a portion of the borrower's equity investment. These escrowed 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 escrowed funds are utilized before any related loan proceeds
are disbursed. At December 31, 1995, of the borrowers advances, $579,000 was
to be disbursed on behalf of borrowers and is included as a liability on the
Company's financial statement.

LOAN COMMITMENTS

At December 31, 1995, the Company had approximately $7.1 million of
loan commitments outstanding to six small business concerns in the lodging
industry. The weighted average interest rate on these loan commitments at
December 31, 1995 was 10.95%. In addition, the Company had approximately $6.7
million of loan commitments outstanding on 12 partially funded construction
loans and $1.9 million of loan commitments outstanding on three Program loans.
To the extent the Company has available funds, an additional $11.9 million in
commitments made by the Investment Manager was designated for the Company at
December 31, 1995, with a weighted average interest rate of 10.74%. It is
anticipated that these loans will be funded by the Company.

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. 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."

-32-
<PAGE> 38
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 and $1,189,000 in management fees for the years ended
December 31, 1994 and 1995, respectively. Of the total management fees paid or
payable to the Investment Manager as of December 31, 1994 and 1995, $71,500 and
$244,000, respectively, has been offset against commitment fees as a direct
cost of originating fees. Pursuant to the Investment Management Agreement,
advisory fees of approximately $58,000 were waived by the Investment Manager
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.

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 Investment Manager 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.

-33-
<PAGE> 39
The Company has not purchased or otherwise acquired equity securities
(other than the acquisition of securities upon foreclosure of a security
interest), 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.

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.

-34-
<PAGE> 40
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 Cohen . . . . . . . . . . . . . . . . . Trust Manager

Roy H. Greenberg . . . . . . . . . . . . . . . Trust Manager

Irving Munn . . . . . . . . . . . . . . . . . . Trust Manager

Dr. Martha R. Greenberg(2)(3) . . . . . . . . . Proposed Trust Manager

Dr. Ira Silver(3) . . . . . . . . . . . . . . . Proposed 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. Messrs. Cohen,
Greenberg and Munn serve as Independent Trust Managers.
(2) Lance B. Rosemore and Dr. Andrew S. Rosemore are brothers and Dr. Martha R.
Greenberg is their sister.
(3) Dr. Greenberg and Dr. Silver (who will be an Independent Trust Manager if
elected to the Board) have been nominated by the Board of Trust Managers to
serve as trust managers, subject to approval of the shareholders at the
Company's 1996 Annual Meeting of Shareholders to be held May 23, 1996.

Information concerning the trust managers, proposed 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.

-35-
<PAGE> 41
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, 45, 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 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, 35, 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. Ms. Brownmiller is a Certified Public Accountant.

MR. NATHAN COHEN--Mr. Cohen, 50, has been a 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.

MR. ROY H. GREENBERG--Mr. Greenberg, 37, has been a 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 a trust manager of the
Company since September 1990. 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. MARTHA R. GREENBERG--Dr. Greenberg, 45, 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 Rosemore and Dr. Andrew Rosemore.

DR. IRA SILVER--Dr. Silver, 50, 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

-36-
<PAGE> 42
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 three 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 or would affect 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 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).

TRANSACTIONS WITH AFFILIATES

The Bylaws of the Company provide that, except as otherwise provided
by the Declaration of Trust, 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 or 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 in either
case (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 trust managers who are not interested in the transaction 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. See "Risk Factors--Conflicts of Interest; Transactions with
Affiliates."

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

-37-
<PAGE> 43
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 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
purchase an aggregate of up to 180,000

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<PAGE> 44
Common Shares of the Company. The Board of Trust Managers has approved
amendments to the Share Option Plans to provide for the issuance of options
under the Share Option Plans to acquire in the aggregate Common Shares in an
amount equal to 6% of the issued and outstanding Common Shares at any time.
Such amendments are subject to the approval of the Company's shareholders at
the 1996 Annual Meeting of Shareholders. 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 covering up to an
aggregate of 160,000 Common Shares. 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.

-39-
<PAGE> 45
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 covering up to an aggregate of 20,000 Common Shares.
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 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 Managers 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 Rates of
Number of % of Total Share Price
Securities Options Appreciation for
Underlying Granted to Option Term
Options Granted Employees in Exercise Price --------------------
Name (#) Fiscal Year ($/Share) Expiration Date 5% ($) 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>

-40-
<PAGE> 46
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
Shares Underlying Unexercised Value of Unexercised In-
Acquired Options at the-Money Options at
on December 31, 1995 December 31, 1995
Exercise Value (exercisable/unexercisable) (exercisable/unexercisable)
Name (#) 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)/ 7,936(e)/
7,680(u) 18,720(u)

Barry N. Berlin 1,498 6,834 2,342(e)/ 10,246(e)/
7,680(u) 18,720(u)

Mary J. Brownmiller 307 1,401 893(e)/ 3,907(e)/
2,400(u) 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.

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 16 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
</TABLE>

-41-
<PAGE> 47
<TABLE>
<CAPTION>
Positions and Offices
Name With the Investment Manager
---- ---------------------------
<S> <C>
Mary J. Brownmiller(2) . . . . . . . . . . . . Senior Vice President

Dr. Irvin M. Borish . . . . . . . . . . . . . . Director

Robert Diamond . . . . . . . . . . . . . . . . Director

Dr. Martha R. Greenberg(1) . . . . . . . . . . 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 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.

-42-
<PAGE> 48
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. The Investment Management Agreement is
not assignable by the Investment Manager without the written consent of the
Company. All transactions with the Investment Manager, including any
modification of the Investment Management Agreement, 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 is required. 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 advisers 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.
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

-43-
<PAGE> 49
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 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.

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<PAGE> 50
PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of the outstanding Common Shares as of March 29, 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 (excluding proposed trust managers) and executive officer, and (iii)
the trust managers (excluding proposed 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 Percent Prior
Name and Address Shares Beneficially to the
of Beneficial Owner Owned Offering
------------------- ----- --------
<S> <C> <C>
Lance B. Rosemore(1) . . . . . . . . . . . . . 20,543 *

Dr. Andrew S. Rosemore(2) . . . . . . . . . . . 68,385 1.9%

Nathan 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 (excluding proposed trust
managers) and executive officers as a group (8 110,061 3.1%
persons)** . . . . . . . . . . . . . . . . . .
</TABLE>

- ------------------
* Less than 1%.
** Dr. Martha R. Greenberg, a nominee to the Board of Trust Managers,
beneficially owns 26,795 Common Shares, and Dr. Ira Silver, the other
nominee, owns no Common Shares.
(1) 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.
(2) 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.
(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.

-45-
<PAGE> 51
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, _________ Common
Shares will be issued and outstanding (________ Common Shares on a fully
diluted basis assuming issuance of all Common Shares reserved for issuance upon
exercise of options which may be granted under the Share Option Plans),
excluding up to 300,000 Common Shares which may be purchased by the
Underwriters to cover over-allotments, if any, and 60,000 Common Shares which
may be purchased in the Direct Offering.

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

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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.

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

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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.

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

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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.

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.

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FEDERAL INCOME TAX CONSIDERATIONS

The discussion below is based on the advice of Winstead Sechrest &
Minick P.C., counsel to the Company.

GENERAL

The Company has elected to be taxed as a REIT for Federal income tax
purposes commencing with its tax year ended December 31, 1993. The following
general summary of the Federal tax rules governing a REIT and its shareholders
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.

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.

In addition to the opinion filed as an exhibit to the registration
statement of which this Prospectus is a part, the Company and the Underwriters
will, prior to the closing of this offering, obtain an opinion of Winstead
Sechrest & Minick P.C., counsel to the Company, 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. 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.

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

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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

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shareholder who does not provide the Company with required 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

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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.

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. 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," computed
without regard to the dividends paid deduction but 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.

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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
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.

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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 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.

-55-
<PAGE> 61
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.

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.

-56-
<PAGE> 62
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 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

-57-
<PAGE> 63
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. 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

-58-
<PAGE> 64
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.

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.

-59-
<PAGE> 65
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement
between the Company 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:

NUMBER
OF COMMON
UNDERWRITER 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 ________ 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 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.

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 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

-60-
<PAGE> 66
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.

-61-
<PAGE> 67
GLOSSARY

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

<TABLE>
<S> <C>
Average Annual Value of All The book value of total assets determined in accordance with
Assets 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 The book value of Invested Assets determined in accordance with
Invested Assets 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 The book value of total assets determined in accordance with
Assets GAAP on the first day of the quarter and on the last day of the
quarter, divided by two.

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

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.

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

-62-
<PAGE> 68

PMC COMMERCIAL TRUST
INDEX TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . F-2

Financial Statements:

Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Statements of Beneficiaries' Equity . . . . . . . . . . . . . . . . . . . . . . F-5

Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>

F-1
<PAGE> 69

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> 70
PMC COMMERCIAL TRUST
BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1994 1995
----------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Loans receivable, net . . . . . . . . . . . . . . . . . . . . $ 32,693,752 $ 59,129,536
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . 18,809,314 173,679
----------------- ---------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . 51,503,066 59,303,215
----------------- ---------------

Other assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,789 33,504
Other receivables . . . . . . . . . . . . . . . . . . . . . . - 26,382
Interest receivable . . . . . . . . . . . . . . . . . . . . . 208,525 410,073
Organization costs, net . . . . . . . . . . . . . . . . . . . 32,141 24,101
----------------- ---------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . 281,455 494,060
----------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,784,521 $ 59,797,275
================= ===============
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 7,920,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . 1,033,659 1,518,896
Accounts payable . . . . . . . . . . . . . . . . . . . . . . - 14,175
Interest payable . . . . . . . . . . . . . . . . . . . . . . - 56,267
Borrower advances . . . . . . . . . . . . . . . . . . . . . . 2,346,162 579,133
Unearned commitment fees . . . . . . . . . . . . . . . . . . 560,728 599,978
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . 184,523 844,786
Unearned construction monitoring fees . . . . . . . . . . . . 219,048 81,008
----------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 4,344,120 11,614,243
----------------- ---------------

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 and
3,491,716 shares issued and outstanding at December 31,
1994 and December 31, 1995, respectively . . . . . . . . 34,445 34,917
Additional paid-in capital . . . . . . . . . . . . . . . . . 47,704,383 48,326,337
Cumulative net income . . . . . . . . . . . . . . . . . . . . 3,215,294 8,111,318
Cumulative dividends . . . . . . . . . . . . . . . . . . . . (3,513,721) (8,289,540)
----------------- ---------------
Total beneficiaries' equity . . . . . . . . . . . . . . . . . . 47,440,401 48,183,032
----------------- ---------------
Total liabilities and beneficiaries' equity . . . . . . . . . . $ 51,784,521 $ 59,797,275
================= ===============
Net asset value per share . . . . . . . . . . . . . . . . . . . $13.77 $13.80
================= ===============
</TABLE>

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

F-3
<PAGE> 71
PMC COMMERCIAL TRUST
STATEMENTS OF INCOME

June 4, 1993
(Date of Years Ended December 31,
Inception) to -----------------------------------
December 31, 1993 1994 1995
----------------- -------------- -------------
<S> <C> <C> <C>
Revenue:
Interest income - loans . . . . . . . . . $ 3,039 $ 2,289,355 $ 5,610,391
Interest and dividends - other investments 12,678 1,221,768 324,779
Other income . . . . . . . . . . . . . . - 179,649 295,245
---------- -------------- -------------

Total revenues . . . . . . . . . . . . . . . 15,717 3,690,772 6,230,415
---------- -------------- -------------

Expenses:
Advisory and servicing fees, net . . . . - 357,311 945,720
Legal and accounting fees . . . . . . . . - 32,628 70,940
General and administrative . . . . . . . 565 63,543 96,028
Interest . . . . . . . . . . . . . . . . - 37,148 221,703
---------- -------------- -------------

Total expenses . . . . . . . . . . . . . . . 565 490,630 1,334,391
---------- -------------- -------------

Net income . . . . . . . . . . . . . . . . . $ 15,152 $ 3,200,142 $ 4,896,024
========== ============== =============

Weighted average shares outstanding . . . . . 3,099,530 3,430,009 3,451,091
========== ============== =============

Net income per share . . . . . . . . . . . . $ 0.01 $ 0.93 $ 1.42
========== ============== =============
</TABLE>

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

F-4
<PAGE> 72
PMC COMMERCIAL TRUST
STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE PERIOD FROM JUNE 4, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<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
========= ========= ============ =========== ============ =============

</TABLE>

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

F-5
<PAGE> 73
PMC COMMERCIAL TRUST
STATEMENTS OF CASH FLOWS

June 4, 1993
(Date of Years Ended December 31,
Inception) to ---------------------------------------
December 31, 1993 1994 1995
----------------- ---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . $ 15,152 $ 3,200,142 $ 4,896,024
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)
Deferred commitment fees . . . . . . . . . . . . . . . . . - (166,200) (196,951)
Construction monitoring fees . . . . . . . . . . . . . . . - (39,946) (146,054)
Amortization of organization costs . . . . . . . . . . . . . - 8,040 8,040
Commitment fees collected . . . . . . . . . . . . . . . . . 97,010 1,295,419 546,211
Construction monitoring fees collected, net . . . . . . . . - 258,994 8,014
Changes in operating assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . (40,181) (208,525) (201,548)
Other assets . . . . . . . . . . . . . . . . . . . . . . . - - (26,382)
Interest payable . . . . . . . . . . . . . . . . . . . . . - - 56,267
Borrower advances . . . . . . . . . . . . . . . . . . . . . - 2,346,162 (1,767,029)
Due to affiliates . . . . . . . . . . . . . . . . . . . . . 24,557 159,966 660,263
Accounts payable . . . . . . . . . . . . . . . . . . . . . 187,115 (187,655) 14,175
----------- ------------- -------------

NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . 283,653 6,563,919 3,824,570
----------- ------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded/purchased . . . . . . . . . . . . . . . . . . . . (3,215,660) (34,982,484) (31,711,230)
Principal collected . . . . . . . . . . . . . . . . . . . . . - 4,861,525 4,991,896
Redemption (purchase) of Government securities . . . . . . . . (4,919,616) 5,000,000 -
----------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . (8,135,276) (25,120,959) (26,719,334)
----------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares. . . . . . . . . . . . 46,388,443 5,175,000 582,107
Proceeds from issuance of notes payable. . . . . . . . . . . . - - 9,130,000
Payment of dividends. . . . . . . . . . . . . . . . . . . . . - (2,480,062) (4,250,263)
Payment of issuance costs . . . . . . . . . . . . . . . . . . (3,462,365) (362,250) -
Payment of principal on notes . . . . . . . . . . . . . . . . - - (1,210,000)
----------- ------------- -------------

NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . 42,926,078 2,332,688 4,251,844
----------- ------------- -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . 35,074,455 (16,224,352) (18,642,920)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . - 35,074,455 18,850,103
----------- ------------- -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . $35,074,455 $ 18,850,103 $ 207,183
=========== ============= =============

SUPPLEMENTAL DISCLOSURES:

Dividends reinvested . . . . . . . . . . . . . . . . . . . . $ - $ - $ 40,319
=========== ============= =============
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ - $ 37,148 $ 165,436
=========== ============= =============

</TABLE>

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

F-6
<PAGE> 74
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

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.

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 judgement 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.

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.

F-7
<PAGE> 75
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

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

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.

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 year 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 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.

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.

F-8
<PAGE> 76
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

NOTE 2. LOANS RECEIVABLE: (CONTINUED)

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, approximately $22,000 and
$26,000 of the discount has been recognized as interest income, 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.
No other state had a concentration of 10% or greater at December 31, 1995.
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
December 31, 1994. The Company's loan portfolio was approximately 92% and 96%
concentrated in the lodging industry at December 31, 1994 and 1995,
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 income over the life of the related loan as an
adjustment of yield. The Company had $664,962 and $974,971 in deferred
commitment fees at December 31, 1994 and 1995, 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 and $1,189,000 based upon average annual value of and all
assets of $48,993,937 and $53,884,788 and average annual value of all invested
assets of $18,922,343 and $46,756,497, for the years ended December 31, 1994
and 1995, respectively. The advisory fee for the period January 1 through June
30, 1994, in the amount of $57,932, was waived by the Investment Manager. Of
the amount of service and advisory fees paid or payable to the Investment
Manager as of December 31, 1994 and 1995, $71,500 and $244,000, respectively,
have been offset against commitment fees as a direct cost of originating loans,
respectively (see NOTE 2).

F-9
<PAGE> 77
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

NOTE 4. BORROWER ADVANCES:

The Company finances projects during the construction phase. At
December 31, 1994 and 1995, the Company was in the process of funding
approximately $16.1 million and $15.9 million in construction projects,
respectively, of which $11.4 million and $9.2 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, the
Company had $2.3 million and $579,000, respectively, in funds held on behalf
of borrowers which is included as a liability in the accompanying balance
sheet. The Company will use cash, cash equivalents or available advances under
its revolving credit facility to fund these obligations.

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. 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 years ended
December 31, 1994 and 1995 were not affected by outstanding options, as such
options were anti-dilutive or immaterial (see NOTE 9).

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,
34,190 shares were issued pursuant to the plan.

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.

F-10
<PAGE> 78
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

NOTE 8. SHARE OPTION PLANS: (CONTINUED)

The grants outstanding at December 31, 1995 are:

<TABLE>
<CAPTION>
Number of Exercise
Shares Price Date of Grant Exercise Date Expiration Date
------- ------- ----------------- ----------------- -----------------
<S> <C> <C> <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 currently exercisable at December 31, 1995 were 7,665.

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 currently exercisable at December 31, 1995 were
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 of loan commitments outstanding to 6 corporations,
partnerships or individuals in the lodging industry at December 31, 1995. The
weighted average contractual interest rate on these loan commitments at
December 31, 1995 was 10.95%. In addition, the Company had $6.5 million of
loan commitments outstanding on 12 partially funded construction loans and
approximately $1.9 million of loan commitments outstanding on three SBA Section
504 program loans. 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

F-11
<PAGE> 79
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

NOTE 9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

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 $11.9 million in commitments in the
lodging industry presently issued by the Investment Manager, with a weighted
average interest rate of 10.74% 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%.

NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS:

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 3,533,237 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.

F-12
<PAGE> 80
PMC COMMERCIAL TRUST
NOTES TO FINANCIAL STATEMENTS

NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)

(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.

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:

On March 12, 1996, a special purpose affiliate of the Company, PMC
Commercial Receivable Limited Partnership, a Delaware limited partnership
formed on March 7, 1996 (the "Partnership"), completed a 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, 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. 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 partnership interest in the Partnership.
The Company used such proceeds to pay down outstanding borrowings under the
Company's credit facility and intends to make additional loans in accordance
with its lending criteria.

F-13

<PAGE> 81

<TABLE>
=================================================== ===================================================
<S> <C>
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 2,000,000 SHARES
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 PMC
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY COMMERCIAL TRUST
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. COMMON SHARES OF

BENEFICIAL INTEREST
------------------

TABLE OF CONTENTS

AVAILABLE INFORMATION . . . . . . . . . . . . 1
PROSPECTUS SUMMARY . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . 5 ----------------
USE OF PROCEEDS . . . . . . . . . . . . . . . 12
PRICE RANGE OF COMMON SHARES . . . . . . . . 12 PROSPECTUS
DIVIDENDS AND DISTRIBUTIONS POLICY . . . . . 13
SELECTED FINANCIAL DATA . . . . . . . . . . . 16 ----------------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . 17
BUSINESS . . . . . . . . . . . . . . . . . . 23 OPPENHEIMER & CO., INC.
MANAGEMENT . . . . . . . . . . . . . . . . . 35
INVESTMENT MANAGER . . . . . . . . . . . . . 41 J.C. BRADFORD & CO.
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . 45
DESCRIPTION OF SHARES OF FAHNESTOCK & CO. INC.
BENEFICIAL INTEREST . . . . . . . . . . . 46
CERTAIN PROVISIONS OF THE TEXAS
REIT ACT AND OF THE COMPANY'S , 1996
DECLARATION OF TRUST AND -------- --
BYLAWS . . . . . . . . . . . . . . . . . . 48
FEDERAL INCOME TAX
CONSIDERATIONS . . . . . . . . . . . . . . 50
ERISA CONSIDERATIONS . . . . . . . . . . . . 58
UNDERWRITING . . . . . . . . . . . . . . . . 60
LEGAL MATTERS . . . . . . . . . . . . . . . . 61
EXPERTS . . . . . . . . . . . . . . . . . . . 61
GLOSSARY . . . . . . . . . . . . . . . . . . 62
INDEX TO FINANCIAL STATEMENTS . . . . . . . F- 1

=================================================== ===================================================
</TABLE>

<PAGE> 82
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> <C>
Registration Fee - Securities and Exchange Commission . . . . . . . . . . . . . . . . . . $
---------
NASD Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
American Stock Exchange Listing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Transfer Agent's and Registrar's Fees . . . . . . . . . . . . . . . . . . . . . . . . . *
---------
Printing and Engraving Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
---------
Legal Fees and Expenses (other than Blue Sky) . . . . . . . . . . . . . . . . . . . . . *
---------
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
---------
Blue Sky Fees and Expenses (including fees of counsel) . . . . . . . . . . . . . . . . *
---------
Travel Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
---------
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
=========
</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,

II-1
<PAGE> 83
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 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.

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

Balance Sheets for the Years Ended December 31, 1994 and 1995

Statements of Income for the Period From June 4, 1993 (Date of
Inception) to December 31, 1993, and the Years Ended December
31, 1994 and 1995

Statements of Beneficiaries' Equity for the Period From June 4, 1993
(Date of Inception) to December 31, 1993, and the Years Ended
December 31, 1994 and 1995

II-2
<PAGE> 84
Statements of Cash Flows for the for the Period From June 4, 1993
(Date of Inception) to December 31, 1993, and the Years Ended
December 31, 1994 and 1995

Notes to Financial Statements

b. Schedules to Financial Statements

None.

c. Exhibits

1.1 Form of Underwriting Agreement*

1.2 Form of Purchase Agreement (Direct Offering)*

3.1 Declaration of Trust(1)

3.1(a) Amendment No. 1 to Declaration of Trust(1)

3.1(b) Amendment No. 2 to Declaration of Trust(2)

3.2 Bylaws(1)

4. Instruments defining the rights of security
holders. The instruments are filed in response to
items 3.1 and 3.2 and are incorporated herein by
reference.(1)

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(1)

10.3 1993 Trust Manager Share Option Plan(1)

10.4 Dividend Reinvestment Plan(1)

10.5 Loan Origination Agreement(1)

10.6 Revolving Credit Facility(3)

10.7 Structured Financing(3)

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.

II-3
<PAGE> 85
23.3 Consent of Simpson Thacher & Bartlett*

24. Powers of attorney of the persons signing this
registration statement are included in the
signature page of the registration statement.

99.1 Consent of person named as proposed trust manager

99.2 Consent of person named as proposed trust manager

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

* To be filed by amendment.
(1) 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), and incorporated herein
by reference.
(2) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(3) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.

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> 86
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 on 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 April 23, 1996.

PMC COMMERCIAL TRUST

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

The undersigned trust managers and officers of PMC Commercial Trust
hereby constitute and appoint Lance B. Rosemore and Dr. Andrew S. Rosemore and
each of them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with
full power to execute in our name and on behalf in the capacities indicated
below any and all amendments (including post-effective amendments and
amendments thereto) to this Registration Statement and to file the same, with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission and hereby notify and confirm all that such
attorneys-in-fact, or either of them or substitutes shall lawfully do or cause
to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement 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 April 23, 1996
------------------------------------------ Operating Officer and Trust
Dr. Andrew S. Rosemore Manager

/s/ LANCE B. ROSEMORE President, Chief Executive April 23, 1996
------------------------------------------ Officer, Secretary and Trust
Lance B. Rosemore Manager (principal executive
officer)

</TABLE>

II-5
<PAGE> 87

<TABLE>
<S> <C> <C>
/s/ BARRY N. BERLIN Chief Financial Officer April 23, 1996
------------------------------------------ (principal financial and
Barry N. Berlin accounting officer)

/s/ NATHAN COHEN Trust Manager April 23, 1996
------------------------------------------
Nathan Cohen

/s/ ROY H. GREENBERG Trust Manager April 23, 1996
------------------------------------------
Roy H. Greenberg

/s/ IRVING MUNN Trust Manager April 23, 1996
------------------------------------------
Irving Munn

</TABLE>

II-6
<PAGE> 88
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
No. Description Page
--- ----------- ----
<S> <C> <C>
1.1 Underwriting Agreement*

1.2 Purchase Agreement (Direct Offering)*

3.1 Declaration of Trust(1)

3.1(a) Amendment No. 1 to Declaration of Trust(1)

3.1(b) Amendment No. 2 to Declaration of Trust(2)

3.2 Bylaws(1)

4. Instruments defining the rights of security holders. The
instruments filed in response to items 3.1 and 3.2 and are
incorporated in this item by reference(1)

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(1)

10.3 1993 Trust Manager Share Option Plan(1)

10.4 Dividend Reinvestment Plan(1)

10.5 Loan Origination Agreement(1)

10.6 Revolving Credit Facility(3)

10.7 Structured Financing(3)

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.

23.3 Consent of Simpson Thacher & Bartlett*

24. Powers of attorney of the persons signing this registration
statement are included in the signature page of the
registration statement.

99.1 Consent of person named as proposed trust manager

99.2 Consent of person named as proposed trust manager
</TABLE>

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

* To be filed by amendment.
(1) 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), and incorporated herein by reference.
(2) Previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(3) Previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.

<PAGE> 1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Registration Statement on Form S-11 (File
No. 333-________) 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
April 23, 1996

<PAGE> 1
Exhibit 99.1

CONSENT OF PERSON TO BE NAMED AS A TRUST MANAGER

I hereby consent to the reference to me as a person who is a proposed trust
manager under the heading "Trust Managers and Officers" in the prospectus
constituting a part of this Registration Statement on Form S-11.

/s/ Dr. Martha R. Greenberg
-----------------------------------
Dr. Martha R. Greenberg

Dallas, Texas
April 17, 1996

<PAGE> 1
Exhibit 99.2

CONSENT OF PERSON TO BE NAMED AS A TRUST MANAGER

/s/ Dr. Ira Silver
-----------------------------------
Dr. Ira Silver

Dallas, Texas
April 17, 1996