<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996
FILE NO. 333-2757
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
PMC COMMERCIAL TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)
---------------------
17290 PRESTON ROAD, DALLAS, TEXAS 75252
(214) 380-0044
(Address of Principal Executive Offices)
---------------------
LANCE B. ROSEMORE, PRESIDENT
PMC COMMERCIAL TRUST
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(214) 380-0044
(Name and Address of Agent for Service)
---------------------
Copies to:
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.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
PMC COMMERCIAL TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN PROSPECTUS
- ---- -------------------------------------------------- -----------------------------------
<C> <S> <C>
1 Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page and Outside
Back Cover Page
3 Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors;
Business
4 Determination of Offering Price................... Outside Front Cover Page
5 Dilution.......................................... Not applicable
6 Selling Security Holders.......................... Not applicable
7 Plan of Distribution.............................. Underwriting
8 Use of Proceeds................................... Use of Proceeds
9 Selected Financial Data........................... Selected Financial Data
10 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... Management's Discussion and
Analysis of Financial Condition and
Results of Operations
11 General Information as to Registrant.............. Business; Management; Certain
Provisions of the Texas REIT Act
and the Company's Declaration of
Trust and Bylaws
12 Policy with Respect to Certain Activities......... Business
13 Investment Policies of Registrant................. Prospectus Summary; Business
14 Description of Real Estate........................ Not applicable
15 Operating Data.................................... Not applicable
16 Tax Treatment of Registrant and Its Security
Holders........................................... Federal Income Tax Considerations
17 Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters..... Outside Front Cover Page; Price
Range of Common Shares; Dividends
and Distributions Policy;
Description of Shares of Beneficial
Interest
18 Description of Registrant's Securities............ Description of Shares of Beneficial
Interest
19 Legal Proceedings................................. Business
20 Security Ownership of Certain Beneficial Owners
and Management.................................... Principal Shareholders
21 Directors and Executive Officers.................. Management
22 Executive Compensation............................ Management; Investment Manager
23 Certain Relationships and Related Transactions.... Risk Factors; Investment Manager
24 Selection, Management and Custody of Registrant's
Investments....................................... Business; Investment Manager
25 Policies with Respect to Certain Transactions..... Business
26 Limitations of Liability.......................... Management; Description of Shares
of Beneficial Interest
27 Financial Statements and Information.............. Prospectus Summary; Selected
Financial Data; Financial
Statements
28 Interests of Named Experts and Counsel............ Experts; Legal Matters
29 Disclosure of Commission Position on
Indemnification
for Securities Act Liabilities.................... Not applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
2,000,000 SHARES
PMC COMMERCIAL TRUST
COMMON SHARES OF BENEFICIAL INTEREST
---------------------
PMC Commercial Trust (the "Company") is a Texas real estate investment
trust that originates loans to small business enterprises which are primarily
collateralized by first liens on real estate of the related business. The
Company principally lends to small businesses in the lodging industry. The
Company also targets the commercial real estate, service, retail and
manufacturing industries. See "Business." The Company's investment advisor is
PMC Advisers, Inc., a wholly-owned subsidiary of PMC Capital, Inc. and an
affiliate of the Company. See "Investment Manager." The Company has elected to
be taxed as a real estate investment trust ("REIT") for Federal tax purposes.
See "Federal Income Tax Considerations."
All of the Common Shares of Beneficial Interest of the Company, $.01 par
value per share (the "Common Shares"), offered hereby are being sold by the
Company. In addition to the 2,000,000 Common Shares offered by the Underwriters
(the "Underwritten Offering"), the Company is offering, by means of this
Prospectus, 60,000 Common Shares (the "Direct Offering") directly to certain
officers and trust managers of the Company at the Price to Public net of
Underwriting Discount. Upon completion of the Underwritten Offering and the
Direct Offering (together, the "Offering"), the executive officers and trust
managers of the Company will beneficially own 3.5% of the issued and outstanding
Common Shares.
The Common Shares are listed on the American Stock Exchange under the
symbol "PCC." On June 6, 1996, the closing sales price of the Common Shares as
reported on the American Stock Exchange was $16.125 per share. See "Price Range
of the Common Shares." On May 23, 1996, the Company declared a quarterly
dividend of $0.38 per Common Share payable on July 15, 1996 to holders of record
as of June 28, 1996. Purchasers of Common Shares in the Offering will not be
entitled to receive such dividend. The Company has paid, and intends to continue
to pay, quarterly dividends to its shareholders. See "Price Range of Common
Shares" and "Dividends and Distributions Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $ (4)
======================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $300,000 payable by
the Company.
(3) The Company has granted the Underwriters an option, exercisable, from time
to time, within 30 days, to purchase up to 300,000 additional Common Shares
at the Price to Public per share, less the Underwriting Discount, for the
purposes of covering over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
(4) Excludes $ to be received by the Company from the Direct Offering if
all Common Shares offered in the Direct Offering are sold.
---------------------
The Common Shares are offered by the Underwriters when, as and if delivered
to and accepted by them, subject to their right to withdraw, cancel or reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the Common Shares will be
made against payment on or about , 1996 at the office of Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.
---------------------
OPPENHEIMER & CO., INC.
J.C. BRADFORD & CO.
FAHNESTOCK & CO. INC.
The date of this Prospectus is June , 1996
<PAGE> 4
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR ON THE AMERICAN
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
can be examined without charge at, or copies obtained upon payment of the
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Such reports, proxy statements and other information
can also be inspected without charge, or copies obtained upon payment of the
prescribed fees, at the offices of the American Stock Exchange located at 86
Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, with respect to the Common Shares offered pursuant to
this Prospectus. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and financial statement schedules thereto. For further
information with respect to the Company and the Common Shares offered hereby,
reference is made to the Registration Statement and such exhibits and financial
statement schedules, copies of which may be examined without charge at, or
obtained upon payment of prescribed fees from, the Commission and its regional
offices at the locations listed above.
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company is required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
American Stock Exchange requirements, if any, holders of the Common Shares
receive annual reports containing audited financial statements with a report
thereon from the Company's independent public accountants, and upon request
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
description and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Glossary.
THE COMPANY
PMC Commercial Trust (the "Company") originates loans to small business
enterprises which are primarily collateralized by first liens on real estate of
the related business. The Company principally lends to small businesses in the
lodging industry. The Company also targets the commercial real estate, service,
retail and manufacturing industries. The Company, a Texas real estate investment
trust, was formed in June 1993, completed its initial public offering in
December 1993 and has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
The Company lends primarily to borrowers involved in the lodging industry.
The majority of the Company's loans in the lodging industry are to
owner-operated facilities generally under national hotel or motel franchises. As
of March 31, 1996, (i) 96% of the Company's loan portfolio consisted of loans
for the acquisition, renovation and construction of hotels, and (ii) Days Inn
and Holiday Inn franchisees accounted for 20.3% and 18.5%, respectively, of the
Company's outstanding loan portfolio. Management believes that borrowers in the
hotel and motel franchise industry are underserved by traditional lending
sources. Based on statistics prepared by the Small Business Administration (the
"SBA"), SBA loans to the lodging industry had lower delinquencies and
charge-offs as compared to the average of all SBA loans for the ten year period
ended December 31, 1994. In addition, based on its lending history and the
lending history of PMC Capital, Inc., the Company believes that loans to such
lodging franchisees generally represent better credit risks than loans to other
types of hotel and motel businesses because such businesses (i) employ proven
business concepts, (ii) have consistent product quality, (iii) are screened and
monitored by franchisors, and (iv) generally have a higher rate of success as
compared to other independent lodging businesses.
From commencement of operations through March 31, 1996, the Company
originated or purchased 76 loans in an aggregate principal amount funded of
approximately $75 million. At March 31, 1996, all loans were paying as agreed,
and the Company had experienced no loan losses and no charge-offs. There can be
no assurance, however, that the Company will not experience loan losses and
charge-offs in the future. The loan amounts generally do not exceed the lesser
of 70% of the fair value or cost of the collateral.
The investments of the Company are managed by PMC Advisers, Inc. (the
"Investment Manager" or "PMC Advisers"), a wholly-owned subsidiary of PMC
Capital, Inc. (together with its subsidiaries, "PMC Capital"). The Company is an
affiliate of PMC Capital, which primarily engages in the business of originating
loans to small businesses under loan guarantee and funding programs sponsored by
the SBA. The predecessor to PMC Capital, Inc. was incorporated in 1979, and the
common stock of PMC Capital, Inc. is currently traded on the American Stock
Exchange.
The Company's principal business objective is to maximize shareholder
returns by expanding its loan portfolio while adhering to its underwriting
criteria. The Company currently has three principal strategies to achieve this
objective. First, the Company expects to continue to benefit from the
established customer base of PMC Capital due to the referral system available
through PMC Advisers. Many of the Company's existing and potential borrowers
have other projects that are currently financed by PMC Capital; however, their
financing needs have grown over time and now exceed the limitations set for SBA
approved loan programs. In addition, borrowers who have financial strength and
stability in excess of the SBA loan program criteria represent continuing
lending opportunities. Second, the Company is seeking to expand its
relationships with national hotel and motel franchisors to secure a consistent
flow of lending opportunities. For example, on April 12, 1996, the Company
entered into a marketing agreement with U.S. Franchise Systems, Inc. ("USFS")
whereby USFS, through its wholly-owned subsidiary, Microtel Inns and Suites
Franchising, Inc.
3
<PAGE> 6
("Microtel"), will present and market to prospective Microtel franchisees the
Company's current financing programs. The third principal strategy of the
Company is to continue to obtain cost-effective financing to maximize its
growth. On March 12, 1996, the Company completed a private placement of
$29,500,000 of Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes"),
through a special purpose affiliate of the Company, PMC Commercial Receivable
Limited Partnership, a Delaware limited partnership (the "Partnership"). The
Company owns, directly or indirectly, all of the interests in the Partnership.
In connection with the private placement, the Notes received a "AA" rating from
Duff & Phelps Credit Rating Co.
The Company's principal executive offices are located at 17290 Preston
Road, Dallas, Texas 75252, and its telephone number is (214) 380-0044.
RISK FACTORS
An investment in the Common Shares involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to any investment in the Company. Such risks include, among others:
- Substantially all of the Company's outstanding loans were to businesses
in the lodging industry (96% at March 31, 1996).
- The Company's business is subject to the risk that borrowers will not
satisfy their debt service obligations and the risk that the value of the
collateral securing a loan may be insufficient to meet all obligations.
- The Company is dependent for the selection, structuring, closing and
monitoring of its investments on the officers of the Investment Manager.
- Many entities, as well as individuals, compete for investments similar to
those proposed to be made by the Company, some of whom have far greater
resources than the Company.
- The officers of the Company and the Investment Manager will be subject to
certain potential conflicts of interest.
- Interest rate mismatches could negatively impact the Company's net income
and dividend yield and the market price of the Common Shares.
- The Company will be taxed at corporate rates if it fails to maintain its
qualification as a REIT.
- The Company borrows for the purpose of investment leverage, which may be
considered a speculative investment technique.
4
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary financial data of the Company and
should be read in conjunction with the financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. The
summary financial data below provides information about the Company's financial
history and may not be indicative of future operating results of the Company.
The data for the period from June 4, 1993 (date of inception) to December 31,
1993 and the years ended December 31, 1994 and 1995 has been derived from
audited financial statements. The data for the three months ended March 31, 1995
and 1996 has been derived from unaudited financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993 YEARS ENDED THREE MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1993 1994 1995 1995 1996
------------------- ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans............ $ 3 $2,289 $5,610 $1,107 $1,795
Interest and dividends-
other investments............. $ 13 $1,222 $ 325 $ 230 $ 54
Other income..................... $ -- $ 180 $ 295 $ 84 $ 57
Total revenues................... $ 16 $3,691 $6,230 $1,421 $1,906
Expenses:
Advisory and servicing fees,
net........................... $ --(3) $ 357 $ 946 $ 161 $ 276
Interest......................... $ -- $ 37 $ 221 $ 16 $ 252
Other............................ $ 1 $ 97 $ 167 $ 59 $ 34
Total expenses................... $ 1 $ 491 $1,334 $ 236 $ 562
Net income......................... $ 15 $3,200 $4,896 $1,185 $1,344
Weighted average common shares
outstanding...................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
Net income per common share........ $0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
Dividends per common share......... $ --(3) $ 1.02 $ 1.38 $ 0.30 $ 0.37
Return on average assets(1)........ --(3) 6.5% 8.8% 9.1%(5) 7.5%(4)(5)
Return on average common
beneficiaries' equity(2)......... --(3) 6.9% 10.2% 10.0%(5) 11.1%(5)
</TABLE>
<TABLE>
<CAPTION>
AT END OF PERIOD
-----------------------------------------------
DECEMBER 31,
-------------------------------
MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Loans receivable.................................. $ 3,119 $32,694 $59,130 $62,958
Total assets...................................... $43,153 $51,785 $59,797 $83,165
Notes payable..................................... $ -- $ -- $ 7,920 $29,500
Beneficiaries' equity............................. $42,941 $47,440 $48,183 $49,001
Total liabilities and beneficiaries' equity....... $43,153 $51,785 $59,797 $83,165
</TABLE>
- ---------------
(1) Based on the Average Annual Value of All Assets. See "Glossary."
(2) Based on the total beneficiaries' equity on the first day of the year and on
the last day of each quarter of such year (i) divided by five for the years
ended December 31, 1994 and 1995 and (ii) divided by two for the three
months ended March 31, 1995 and 1996.
(3) Not applicable due to initial period of the Company's operations which
commenced on December 28, 1993.
(4) The decrease was primarily caused by the private placement of the Notes on
March 12, 1996.
(5) Percentage annualized.
5
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered to the Public..... 2,000,000 Common Shares
Direct Offering......................... 60,000 Common Shares
Common Shares Outstanding After the
Offering(1)........................... 5,639,346 Common Shares
Use of Proceeds......................... The net proceeds to the Company are estimated to be
approximately $ . Initially, substantially
all of the net proceeds of the Offering will be
invested in temporary investments of the types
described under "Business -- Policies with Respect
to Certain Activities." As rapidly as practicable
thereafter, the net proceeds will be used to make
additional loans in accordance with the Company's
lending criteria.
AMEX Symbol............................. "PCC"
</TABLE>
- ---------------
(1) Excludes 13,990 shares issuable upon exercise of outstanding options under
the Company's 1993 Employee Share Option Plan and 1993 Trust Manager Share
Option Plan which are currently exercisable.
DIVIDENDS AND DISTRIBUTIONS POLICY
In accordance with applicable REIT requirements, the Company has to date
made distributions in accordance with the Code. The Company paid dividends per
share in the aggregate of $1.02, $1.38 and $0.37 for the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, respectively. See
"Price Range of Common Shares." On May 23, 1996, the Company declared a
quarterly dividend of $0.38 per Common Share payable on July 15, 1996 to holders
of record as of June 28, 1996. Purchasers of Common Shares in the Offering will
not be entitled to receive such dividend. The Company intends to continue to pay
regular quarterly dividends to its shareholders. See "Dividends and
Distributions Policy."
FEDERAL INCOME TAX CONSIDERATIONS
The Company has elected to be taxed as a REIT, commencing with its taxable
year ended December 31, 1993. As a REIT, the Company generally is not subject to
Federal income tax to the extent it distributes at least 95% of its REIT taxable
income (which does not include capital gains) to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to Federal income tax on its taxable income at regular corporate rates.
In addition, the Company would generally be disqualified from treatment as a
REIT for the four subsequent taxable years. See "Federal Income Tax
Considerations -- Requirements for Qualification as a Real Estate Investment
Trust."
6
<PAGE> 9
RISK FACTORS
An investment in the Company involves various investment risks. Prospective
investors should carefully consider the following factors together with the
information provided elsewhere in this Prospectus in evaluating an investment in
the Company.
CONCENTRATION OF INVESTMENTS
At March 31, 1996, approximately 96% of the Company's outstanding loans
were to small businesses in the lodging industry. There can be no assurance that
the Company will continue to experience the positive results it has historically
achieved from these lending activities or that market conditions will enable the
Company to maintain or increase this level of loan concentration. Any economic
factors that negatively impact this industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, at March 31, 1996 loans to businesses located in Texas and
Maryland comprised 31% and 11%, respectively, of the Company's outstanding loan
portfolio. An economic downturn in either of these states could have a material
adverse effect on the Company's business, financial condition and results of
operations.
As of March 31, 1996, Days Inn and Holiday Inn franchisees accounted for
20.3% and 18.5%, respectively, of the Company's outstanding loan portfolio. Any
economic factors that negatively impact such franchisors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CREDIT RISKS OF LOANS
The Company's lending business is subject to various risks, including, but
not limited to, the risk that borrowers will not satisfy their debt service
obligations and the risk that the value of the collateral securing a loan, after
payment and collection of foreclosure expenses, may be less than the principal
amount of such loan. In addition, because the Company's borrowers are small
businesses with more limited financial resources, smaller market shares, more
restricted access to funding sources, higher leverage and greater dependence on
the talents and efforts of one or a few people than larger, more established
companies, the Company assumes a greater risk of loss than might otherwise be
the case if it focused on lending to larger companies better able to withstand
business and economic downturns. The Company attempts to reduce its risk of loss
by evaluating each borrower's creditworthiness and the value of the collateral
securing each loan; by limiting the maximum amount loaned to any single
borrower; by taking security interests in assets, including real property and
furniture, fixtures and equipment, of the borrower and, in certain cases,
parties related to the borrower; and by obtaining personal guarantees. There can
be no assurances, however, that such actions will be sufficient to avoid losses.
With respect to business loans purchased, much of the information available to
the Investment Manager about such loans is generated at the time that the loan
was made by the original lending institution. This information may be largely
out-of-date when the Investment Manager considers the loan for purchase, and the
ability of the Investment Manager to obtain more current information may be
limited. At March 31, 1996, the Company had no loan delinquency greater than 30
days, and based upon management's assessment of the likelihood of payment in
full of the Company's outstanding loans, no loan loss reserve has been
established. Changes to the facts and circumstances of the borrower, the lodging
industry and the economy may result in the establishment of significant loan
loss reserves. In the event the Company experiences a loan loss, it could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Underwriting Criteria and Loan
Originations" and "-- Delinquency and Collections."
RELIANCE ON MANAGEMENT AND INVESTMENT MANAGER
The Company is dependent for the selection, structuring, closing and
monitoring of its investments upon the efforts and abilities of the officers of
the Investment Manager, Dr. Fredric M. Rosemore, the Investment Manager's
Chairman of the Board, Lance B. Rosemore, the Investment Manager's President and
Chief Executive Officer, and Dr. Andrew S. Rosemore, the Investment Manager's
Executive Vice President and
7
<PAGE> 10
Chief Operating Officer. The loss or interruption of the services of these
persons could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the directors and
officers of the Investment Manager also serve as directors and officers of PMC
Capital and its affiliates and devote such time as they deem appropriate to PMC
Capital and such affiliates. Although ultimate control of the Company lies with
the trust managers, the trust managers will rely primarily on the advice of the
Investment Manager with respect to operating decisions. Accordingly, the success
of the Company is dependent in large part on the services provided by the
Investment Manager. The Investment Management Agreement can be terminated by the
Investment Manager for any reason upon 60 days' prior written notice delivered
to the Company, pursuant to a majority vote of the independent directors of the
Investment Manager. Other than this notice requirement, there is no contractual
impediment to the termination of the Investment Management Agreement by PMC
Advisers. At March 31, 1996, the Company had approximately $35.7 million in loan
commitments outstanding. In the event the Investment Management Agreement were
terminated, a significant portion of the then outstanding commitments would no
longer be required to be funded by the Company; however, such commitments will
remain the obligations of PMC Advisers. Although management of the Company
believes that the Company can obtain the services of third party investment
advisors or hire sufficient personnel to internally manage the Company's
investments in the event that the Investment Management Agreement is not
renewed, 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 "-- Policies with Respect to Certain Activities."
CONFLICTS OF INTEREST; TRANSACTIONS WITH AFFILIATES
The officers of the Investment Manager are also officers of PMC Capital and
in such capacities operate the business of PMC Capital and its subsidiaries. PMC
Capital and its subsidiaries have originated and purchased business loans
similar to the types of loans in which the Company invests and may do so in the
future under certain limited circumstances. The Investment Manager could also
establish or advise additional investment entities in the future for the purpose
of investing in business loans.
Pursuant to a loan origination agreement among the Investment Manager, PMC
Capital and the Company (the "Loan Origination Agreement"), loans which meet the
Company's underwriting criteria are to be funded by the Company provided that
funds are available. In such event, loans generally will not be made by PMC
Capital other than: (i) loans in an original principal amount not exceeding
$1,100,000 made pursuant to the SBA Section 7(a) or Small Business Investment
Company ("SBIC") loan programs utilized by PMC 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
8
<PAGE> 11
Company with respect to loan origination opportunities will be resolved in
accordance with the criteria set forth in the Loan Origination Agreement. See
"Business -- Underwriting Criteria and Loan Originations." The participation by
PMC Capital in the business loan market could make it more difficult for the
Company to originate loans on favorable terms or purchase business loans at
attractive prices which could have a material adverse effect on the Company's
business, financial conditions and results of operations.
The fee of the Investment Manager is primarily based on the value of the
Company's assets. As a result, any increases in the value of the Company's
assets from leverage will benefit the Investment Manager and the Investment
Manager will have a potential conflict in determining whether the Company should
write-down the value of any assets. The Investment Manager has agreed to a
reduced fee with respect to leveraged assets. In addition, the Annual Fee of the
Investment Manager will be earned only to the extent that the Company's annual
Return on Average Common Equity Capital, after deducting the Base Fee and the
Annual Fee, is at least equal to the minimum return of 6.69%. Consequently, the
Investment Manager could approve higher risk investments to maximize current
income in order to exceed 6.69% which could result in increased risk of loss to
the Company's assets. Because the maximum Annual Fee is 1% of the Average Annual
Value of All Invested Assets and is payable regardless of the amount of
distributions to shareholders as long as the minimum return of 6.69% is
attained, there may be no direct correlation between payment of the Annual Fee
and the amount of distributions to shareholders. See "Management" and
"Investment Manager."
INTEREST RATE AND PREPAYMENT RISK
The ability of the Company to achieve certain of its investment objectives
will depend in part on its ability to continue to borrow funds or issue
preferred shares of beneficial interest ("Preferred Shares") on favorable terms,
and there can be no assurance that such borrowings or issuances can in fact be
achieved. The Company's net income is materially dependent upon the "spread"
between the rate at which it borrows funds (typically either short-term at
variable rates or long-term at fixed rates) and the rate at which it loans these
funds (typically long-term at fixed rates). During periods of changing interest
rates, interest rate mismatches could negatively impact the Company's net income
and dividend yield and the market price of the Common Shares. If interest rates
decline, the Company may experience significant prepayments, and such
prepayments, as well as scheduled repayments, are likely to be reloaned at lower
rates, which may have an adverse effect on the Company's business, financial
condition and results of operations and on its ability to maintain distributions
at the level then existing.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company must meet a number of highly technical and complex
requirements, described under "Federal Income Tax Considerations," to maintain
its status as a REIT under the Code. Failure to qualify as a REIT would result
in the taxation of the Company at corporate rates and loss of pass-through tax
treatment which would have a significant adverse effect on the Company's
business, financial condition and results of operations and on the return to
shareholders. Failure to qualify as a REIT under the Code during a taxable year
would generally render the Company ineligible to elect REIT status again until
the fifth subsequent taxable year. The Company will not be required to make
distributions to shareholders in the event that it fails to qualify as a REIT
under the Code and there can be no assurance that the Company will continue to
make distributions in such event. Transfers of the Common Shares are subject to
certain restrictions to protect the Company's REIT status under the Code. See
"Description of Shares of Beneficial Interest -- Restrictions on Transfer" and
"Federal Income Tax Considerations." In addition, the Company may be subject to
state or local taxes. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not change
the tax laws with respect to qualification as a REIT, the Federal income tax
consequences of such qualification or the application of state or local taxes to
the Company. Under legislation which became effective in 1992, certain entities
which employ leverage and whose assets consist principally of real estate
mortgages may be classified as taxable mortgage pools. To date, the Internal
Revenue Service has issued practically no guidance on the classification of
REITs as taxable mortgage pools and it is unclear whether the Company would ever
be classified as one. See "Federal Income Tax Considerations -- Other Taxation."
9
<PAGE> 12
LEVERAGE
The Company has established a revolving credit facility, completed a
private placement of the Notes through the Partnership and may issue Preferred
Shares (although the Company has no current plans to do so) to acquire
additional funds to continue its lending activities. To the extent that the
Company utilizes its credit facility, executes notes or issues Preferred Shares,
the Company is leveraged. Lenders and preferred beneficiaries will have fixed
dollar claims on the Company's assets superior to the claims of the holders of
Common Shares and may require that the Company agree to covenants that could
restrict its flexibility in the future and may limit the Company's ability to
pay dividends. The Company's net income is materially dependent upon the
"spread" between the rate at which it borrows funds (typically either short-term
at variable rates or long-term at fixed rates) and the rate at which it loans
these funds (typically long-term at fixed rates). If the returns on loans
originated by the Company with funds obtained from borrowings or the issuance of
Preferred Shares fail to cover the cost of such funds, the Company's cash flow
will be reduced and could be negative. Additionally, any increase in the
interest rate earned by the Company on investments in excess of the interest
rate or dividend rate incurred on the funds obtained from either borrowings or
the issuance of Preferred Shares would cause its net income to increase more
than it would without the leverage. Conversely, any decrease in the interest
rate earned by the Company on investments would cause net income to decline by a
greater amount than it would if the funds had not been obtained from either
borrowings or the issuance of Preferred Shares and invested. Leverage is thus
generally considered a speculative investment technique. In order for the
Company to repay indebtedness or meet its obligations in respect of any
outstanding Preferred Shares on a timely basis, the Company may be required to
dispose of assets at a time at which it would not otherwise do so and at prices
which may be below the net book value of the loan. Dispositions of assets may
adversely affect the Company's business, financial condition and results of
operations and the Company's ability to maintain its qualification as a REIT for
Federal tax purposes. See "Business -- Policies with Respect to Certain
Activities" and "Federal Income Tax Considerations."
REMEDIES UPON DEFAULT
In the event of a default on a business loan, the Company's available
remedies would include legal action against the borrower or guarantor and
foreclosure against the collateral securing the loan. The Company could
experience significant delays in exercising its rights as a secured lender and
might incur substantial costs in foreclosing on the mortgaged property and
taking other steps to protect its investment. The Company's rights may, in some
instances, be subordinate to mechanics' liens, materialmens' liens or government
liens which could be significant in amount and which could, therefore, limit the
amount recovered by the Company. In addition, the Company's ability to obtain
payment from the borrower or guarantor to the extent of any deficiency resulting
after the sale of collateral might be limited by bankruptcy or similar laws.
Therefore, there can be no assurance that the Company would ultimately collect
the full amount owed on a defaulted loan.
ENVIRONMENTAL LIABILITIES
The Company may in the future acquire through foreclosure properties that
secured defaulted loans or make direct purchases of real estate. While the
Company performs extensive due diligence investigations into properties both
prior to originating loans secured by such properties and prior to foreclosing
thereon, there is a risk that hazardous substances or wastes, contaminants,
pollutants or sources thereof could be discovered on properties acquired by the
Company or with respect to which the Company is deemed to be an owner or
operator under applicable environmental laws. In such event, the Company could
be required under certain environmental laws to remediate such conditions and
clean up the affected property at its sole cost and expense or to contribute to
the cost of such remediation or clean up, which could have a material adverse
effect on the Company. In addition, the Company could be required to pay fines
and/or penalties imposed by governmental agencies. The Company requires
environmental site assessments of real estate securing loans it makes as a
condition to making such loans; however, there can be no assurance that such
assessments would reveal any or all potential environmental liabilities.
10
<PAGE> 13
CERTAIN LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures and require licensing of originators of loans. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
loans. Depending on the provisions of the applicable law and the specified facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Company to collect all or part of the principal of
or interest on its outstanding loans, could result in penalties to the Company
and may entitle the borrower to a refund of amounts previously paid.
The Company's loans are also subject to Federal laws, including:
(i) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(ii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the ability of
the Company to collect all or part of the principal of or interest on its loans
and in addition could subject the Company to damages and administrative
enforcement. The Company believes that it is in compliance with all applicable
laws.
CHANGES IN INVESTMENT AND FINANCING POLICIES
The investment and financing policies of the Company and its policies with
respect to certain other activities, including growth, capitalization,
distributions, REIT status and operating policies, are established by the trust
managers. See "Business -- Policies with Respect to Certain Activities." The
trust managers may amend or revise these policies from time to time at their
discretion without a vote of the shareholders of the Company.
OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). To ensure that the Company will not fail to qualify as a REIT
under this test, the Declaration of Trust of the Company provides that no holder
of capital shares, other than any trust manager, employee of the Company and any
other person approved by the trust managers, may directly or indirectly own more
than 9.8% of the lesser of the number or value of the outstanding capital
shares; provided, however, in no event may the trust managers grant an exemption
from the foregoing ownership limitation to any trust manager, employee or other
person whose ownership, direct or indirect, of in excess of 9.8% of the lesser
of the number or value of the outstanding capital shares would result in the
termination of the Company's status as a REIT, which could have a material
adverse effect on the Company's business, financial condition and its results of
operations. There can be no assurance that there will not be five or fewer
individuals who will own more than 50% in value of the shares thereby causing
the Company to fail to qualify as a REIT. The ownership limits may discourage a
change of control of the Company and may also (i) deter tender offers for the
Common Shares, which offers may be attractive to the shareholders or (ii) limit
the opportunity for shareholders to receive a premium for their Common Shares
that might otherwise exist if an investor attempted to assemble a block of
Common Shares in excess of 9.8% in number or value of the outstanding Common
Shares or otherwise to effect a change of control of the Company. See
"Description of Shares of Beneficial Interest -- Restrictions on Transfer."
RISK FOR IRAS OR INVESTORS SUBJECT TO ERISA
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider whether the investment
11
<PAGE> 14
of plan assets in the Common Shares satisfies the diversification requirements
of ERISA, whether the investment is prudent in light of possible limitations on
the marketability of the Common Shares, and whether such fiduciaries have
authority to acquire such Common Shares under their appropriate governing
instruments and Title I of ERISA. Also, fiduciaries of an individual retirement
account ("IRA") should consider that an IRA may only make investments that are
authorized by the appropriate governing instruments. See "ERISA Considerations."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act, which are intended to be covered by the safe harbors created
thereby. These statements include the plans and objectives of management for
future operations, including plans and objectives relating to future growth of
the loan portfolio and availability of funds. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
12
<PAGE> 15
THE COMPANY
The Company originates loans to small business enterprises which are
primarily collateralized by first liens on real estate of the related business.
The Company principally lends to small businesses in the lodging industry. The
Company also targets the commercial real estate, service, retail and
manufacturing industries. The Company has elected to be taxed as a REIT under
the Code. The Company, a Texas real estate investment trust, was formed in June
1993 and completed its initial public offering in December 1993.
The Company lends primarily to borrowers involved in the lodging industry.
The majority of the Company's loans in the lodging industry are to
owner-operated facilities generally under national hotel or motel franchises. As
of March 31, 1996, (i) 96% of the Company's loan portfolio consisted of loans
for the acquisition, renovation and construction of hotels, and (ii) Days Inn
and Holiday Inn franchisees accounted for 20.3% and 18.5%, respectively, of the
Company's outstanding loan portfolio. Management believes that borrowers in the
hotel and motel franchise industry are underserved by traditional lending
sources. Based on statistics prepared by the SBA, SBA loans to the lodging
industry had lower delinquencies and charge-offs as compared to the average of
all SBA loans for the ten year period ended December 31, 1994. In addition,
based on its lending history and the lending history of PMC Capital, the Company
believes that loans to such lodging franchisees generally represent better
credit risks than loans to other types of hotel and motel businesses because
such businesses (i) employ proven business concepts, (ii) have consistent
product quality, (iii) are screened and monitored by franchisors, and (iv)
generally have a higher rate of success as compared to other independent lodging
businesses.
From commencement of operations through March 31, 1996, the Company
originated or purchased 76 loans in an aggregate principal amount funded of
approximately $75 million. At March 31, 1996, all loans were paying as agreed,
and the Company had experienced no loan losses and no charge-offs. There can be
no assurance, however, that the Company will not experience loan losses and
charge-offs in the future. The loan amounts generally do not exceed the lesser
of 70% of the fair value or cost of the collateral.
The investments of the Company are managed by PMC Advisers, a wholly-owned
subsidiary of PMC Capital. The Company is an affiliate of PMC Capital, which is
a closed-end management investment company that operates as a business
development company under the Investment Company Act of 1940, as amended. PMC
Capital primarily engages in the business of originating loans to small
businesses under loan guarantee and funding programs sponsored by the SBA. The
predecessor to PMC Capital, Inc. was incorporated in 1979, and the common stock
of PMC Capital, Inc. is currently traded on the American Stock Exchange.
The Company's principal business objective is to maximize shareholder
returns by expanding its loan portfolio while adhering to its underwriting
criteria. The Company currently has three principal strategies to achieve this
objective. First, the Company expects to continue to benefit from the
established customer base of PMC Capital due to the referral system available
through PMC Advisers. Many of the Company's existing and potential borrowers
have other projects that are currently financed by PMC Capital; however, their
financing needs have grown over time and now exceed the limitations set for SBA
approved loan programs. In addition, borrowers who have financial strength and
stability in excess of the SBA loan program criteria represent continuing
lending opportunities. Second, the Company is seeking to expand its
relationships with national hotel and motel franchisors to secure a consistent
flow of lending opportunities. For example, on April 12, 1996, the Company
entered into a marketing agreement with USFS whereby USFS, through its
wholly-owned subsidiary, Microtel, will present and market to prospective
Microtel franchisees the Company's current financing programs. The third
principal strategy of the Company is to continue to obtain cost-effective
financing to maximize its growth. On March 12, 1996, the Company completed a
private placement of $29,500,000 of Notes through the Partnership, a special
purpose affiliate of the Company. The Company owns, directly or indirectly, all
of the interests in the Partnership. In connection with the private placement,
the Notes received a "AA" rating from Duff & Phelps Credit Rating Co.
The Company was organized as a Texas real estate investment trust in June
1993 and has elected to be taxed as a REIT under the Code. The Company's
principal office is located at 17290 Preston Road, Third Floor, Dallas, Texas
75252 and its telephone number is (214) 380-0044.
13
<PAGE> 16
USE OF PROCEEDS
Based upon an assumed offering price of $16.125 per share, the net proceeds
to the Company from the Offering (after deducting estimated offering expenses)
are estimated to be approximately $31.1 million ($35.7 million if the
Underwriters' over-allotment option is exercised in full). Substantially all of
the net proceeds of the Offering will initially be invested in interest bearing
accounts and short-term interest bearing securities. As rapidly as practicable
thereafter, the net proceeds of the Offering will be used to make loans in
accordance with the Company's lending criteria.
PRICE RANGE OF COMMON SHARES
The Common Shares have been traded on the American Stock Exchange under the
symbol "PCC" since February 1995 and before that on the Nasdaq National Market
under the symbol "PMCTS" since December 17, 1993 (the date the Common Shares
first began trading on Nasdaq National Market). As of May 31, 1996, there were
459 holders of record of Common Shares. The following table sets forth for the
periods indicated the high and low sales prices as reported on the American
Stock Exchange and the Nasdaq National Market and the dividends declared by the
Company per share for each such period.
<TABLE>
<CAPTION>
REGULAR SPECIAL
DIVIDENDS DIVIDENDS
QUARTER ENDED HIGH LOW PER SHARE PER SHARE
----------------------------------------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C>
March 31, 1994................................. $15.25 $13.50 $ 0.240 --
June 30, 1994.................................. $15.38 $13.25 $ 0.240 --
September 30, 1994............................. $15.00 $13.50 $ 0.240 --
December 31, 1994.............................. $14.25 $11.25 $ 0.280 $0.02
March 31, 1995................................. $14.00 $11.75 $ 0.300 --
June 30, 1995.................................. $15.13 $12.25 $ 0.315 --
September 30, 1995............................. $15.13 $13.75 $ 0.330 --
December 31, 1995.............................. $17.13 $13.88 $ 0.355 $0.08
March 31, 1996................................. $17.88 $15.75 $ 0.370 --
June 30, 1996 (through June 7, 1996)........... $17.38 $15.50 $ 0.380 --
</TABLE>
14
<PAGE> 17
DIVIDENDS AND DISTRIBUTIONS POLICY
GENERAL
The Company distributes to its shareholders substantially all of its net
investment income and realized net capital gains, if any, as determined for
income tax purposes. Dividends are paid by the Company at the discretion of the
trust managers and depend on the actual cash flow of the Company, its financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Code (see "Federal Income Tax Considerations") and such
other factors as the trust managers may deem relevant. Applicable law may limit
the amount of dividends and other distributions payable by the Company. At each
meeting in any fiscal year for the purpose of declaring dividends, the trust
managers declare a dividend of net investment income at a quarterly rate based
on an estimate of the year's net investment income. A special dividend is also
generally declared prior to the end of December, for distribution during the
following January, to shareholders of record as of the last business day of the
year, in at least the minimum amount required to comply with the Code's
provisions regarding the distribution of the year's distributable net investment
income and net realized capital gains.
Dividends are paid based on taxable income and, accordingly, may be greater
or less than book income. If the Company is unable to distribute amounts
sufficient to satisfy the requirements under the Code relating to its status as
a REIT, the Company could incur liability for taxes and possibly lose its status
as a REIT. See "Federal Income Tax Considerations." In the event that amounts
distributed exceed the earnings and profits of the Company available for
distribution, such excess will be considered a tax free return of capital to a
shareholder to the extent of the shareholder's adjusted basis in his Common
Shares and as capital gain to the extent the distributions exceed both available
earnings and profits and stock basis.
On May 23, 1996, the Company declared a quarterly dividend of $0.38 per
Common Share payable on July 15, 1996 to holders of record as of June 28, 1996.
Purchasers of Common Shares in this Offering will not be entitled to receive
such dividend. For information relating to the frequency and amounts of
dividends paid on the Common Shares, see "Price Range of Common Shares."
DIVIDEND REINVESTMENT PLAN
Pursuant to the Company's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose Common Shares are registered in his own name may elect to have
all distributions reinvested automatically in additional Common Shares by
contacting the American Stock Transfer and Trust Company (the "Plan Agent"). The
Company may place limitations on participation in the Plan to assure the
maintenance of its REIT status. See "Federal Income Tax Considerations."
Shareholders whose Common Shares are held in the name of a nominee may have
distributions reinvested automatically by the nominee in additional Common
Shares under the Plan, but only to the extent the nominee participates on his
behalf. Shareholders whose Common Shares are held in the name of a nominee
should contact the nominee for details. All distributions to investors who do
not participate (or whose nominee does not participate) in the Plan will be paid
by check mailed directly to the record holder by or under the direction of the
Plan Agent.
The Plan Agent will promptly apply a Plan participant's dividends or
distributions to the purchase of newly issued Common Shares from the Company.
The purchase price of Common Shares purchased from the Company will be 98% of
the average of the closing sales prices, as reported in The Wall Street Journal,
at which Common Shares were traded on the last five days on which trading in the
Common Shares is reported to have taken place on the American Stock Exchange
prior to the payment date of the dividend or distribution. The number of Common
Shares to be received by the Plan participants on account of the dividend or
distribution will be calculated on the basis of the initially determined market
price and will be credited to their accounts as of the payment date of the
dividend or distribution.
The Plan Agent will maintain all shareholder accounts in the Plan and will
furnish written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Certificates
for the shares will be retained by the Plan Agent and available upon 20 days'
notice. Because of the length of such notice period, it may take longer for a
shareholder to liquidate Common Shares held under
15
<PAGE> 18
the Plan than Common Shares held outside the Plan. There will be no charge to
participants for reinvesting dividends and capital gains distributions.
The Plan also permits participants to purchase Common Shares thereunder by
making cash payments to the Plan Agent in amounts of not less than $50 or more
than $10,000 per month. These optional cash payments will be applied to acquire
Common Shares from the Company on the same terms as the reinvestment of
dividends.
The automatic reinvestment of distributions will not relieve participants
of any income tax which may be payable on distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan on at
least 90 days' written notice to participants in the Plan. The Company may also
amend or terminate the Plan without notice if necessary to preserve the
Company's REIT status.
The Company has reserved 400,000 Common Shares for issuance pursuant to the
Plan. All Common Shares acquired under the Plan will be originally issued by the
Company, and a written prospectus relating to such Common Shares may be obtained
from the Company or the Plan Agent.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and of the Company and its subsidiaries on a pro forma basis to
give effect to the 2,060,000 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 MARCH 31, 1996
---------------------
ACTUAL PRO FORMA
------- ---------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Short-term debt......................................................... $ -- $ --
======= ========
Long-term debt.......................................................... $ -- $ --
Fixed rate loan backed notes............................................ 29,500 29,500
Beneficiaries' equity:
Common Shares, $.01 par value; 100,000,000 shares authorized;
3,540,988 and 5,600,988(1) outstanding, respectively............... 35 56
--------
Additional paid-in capital.............................................. 49,110 80,179
--------
Cumulative net income................................................... 9,456 9,456
Cumulative dividends.................................................... (9,600) (9,600)
------- --------
Total beneficiaries' equity............................................. 49,001 80,091
------- --------
Total capitalization.................................................. $78,501 $ 109,591
======= ========
</TABLE>
- ---------------
(1) Does not include up to 300,000 shares reserved for issuance upon exercise of
the Underwriters' over-allotment option. See "Underwriting."
17
<PAGE> 20
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for the period from June 4, 1993 (date of inception) to December 31, 1993,
for the years ended December 31, 1994 and December 31, 1995 and for the three
months ended March 31, 1995 and March 31, 1996. The following data should be
read in conjunction with the financial statements of the Company and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The selected
financial data presented below for the period from June 4, 1993 (date of
inception) to December 31, 1993 and the years ended December 31, 1994 and 1995
has been derived from the financial statements of the Company audited by Coopers
& Lybrand L.L.P., independent public accountants, whose report with respect
thereto is included elsewhere in this Prospectus. The selected financial data
presented below for the three months ended March 31, 1995 and 1996 has been
derived from unaudited financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993 YEARS ENDED THREE MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1993 1994 1995 1995 1996
------------------- ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans............. $ 3 $2,289 $5,610 $1,107 $1,795
Interest and dividends -- other
investments.................... $ 13 $1,222 $ 325 $ 230 $ 54
Other income...................... $ -- $ 180 $ 295 $ 84 $ 57
Total revenues.................... $ 16 $3,691 $6,230 $1,421 $1,906
Expenses:
Advisory and servicing fees,
net............................ $ --(3) $ 357 $ 946 $ 161 $ 276
Interest.......................... $ -- $ 37 $ 221 $ 16 $ 252
Other............................. $ 1 $ 97 $ 167 $ 59 $ 34
Total expenses.................... $ 1 $ 491 $1,334 $ 236 $ 562
Net income.......................... $ 15 $3,200 $4,896 $1,185 $1,344
Weighted average common shares
outstanding....................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
Net income per common share......... $0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
Dividends per common share.......... $ --(3) $ 1.02 $ 1.38 $ 0.30 $ 0.37
Return on average assets(1)......... --(3) 6.5% 8.8% 9.1%(5) 7.5%(4)(5)
Return on average common
beneficiaries' equity(2).......... --(3) 6.9% 10.2% 10.0%(5) 11.1%(5)
</TABLE>
<TABLE>
<CAPTION>
AT END OF PERIOD
-----------------------------------------------
DECEMBER 31,
-------------------------------
MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Loans receivable................................... $ 3,119 $32,694 $59,130 $62,958
Total assets....................................... $43,153 $51,785 $59,797 $83,165
Notes payable...................................... $ -- $ -- $ 7,920 $29,500
Beneficiaries' equity.............................. $42,941 $47,440 $48,183 $49,001
Total liabilities and
beneficiaries' equity............................ $43,153 $51,785 $59,797 $83,165
</TABLE>
- ---------------
(1) Based on the Average Annual Value of All Assets. See "Glossary."
(2) Based on the total beneficiaries' equity on the first day of the year and on
the last day of each quarter of such year (i) divided by five for the years
ended December 31, 1994 and 1995 and (ii) divided by two for the three
months ended March 31, 1995 and 1996.
(3) Not applicable due to initial period of the Company's operations which
commenced on December 28, 1993.
(4) The decrease was primarily caused by the private placement of the Notes on
March 12, 1996.
(5) Percentages annualized.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in June 1993 and had no operations prior to
completion of its initial public offering (the "IPO") on December 28, 1993.
Accordingly, there are no comparable 1993 results to the year ended December 31,
1994. The net proceeds to the Company from the IPO were $47,738,828, including
the over-allotment option with respect thereto.
During the three months ended March 31, 1996, the Company originated and
funded $4.8 million of loans, all to businesses operating in the lodging
industry. During the year ended December 31, 1995, the Company originated and
funded $31.7 million of loans, all to businesses operating in the lodging
industry. During the year ended December 31, 1994, the Company originated and
funded or purchased loans with a face value of $35.2 million. Of these loans,
approximately $32.5 million, or 92%, were to corporations and individuals
operating in the lodging industry. As of March 31, 1996, the total portfolio
outstanding was $64.0 million ($62.9 million after reductions for loans
purchased at a discount and deferred commitment fees) with a weighted average
contractual interest rate of approximately 11.2%. The weighted average
contractual interest rate does not include the effects of the amortization of
discount on purchased loans or commitment fees on funded loans. Loans are
collateralized primarily by first liens on real estate acquired and are
guaranteed, for all but one loan, by the principals of the businesses financed.
Included in the funded loans are $1.8 million which have been advanced pursuant
to the SBA 504 program. See "Business -- SBA Section 504 Program." Interest
rates charged on such advances are comparable to those which are customarily
charged by the Company.
CERTAIN ACCOUNTING CONSIDERATIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company follows the accounting practices prescribed by the American
Institute of Certified Public Accountants-Accounting Standards Division in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loan loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. To date, no
loan loss reserves have been established. The determination of whether
significant doubt exists and whether a loan loss provision is necessary for each
loan requires judgment and considers the facts and circumstances existing on the
evaluation date. Changes to the facts and circumstances of the borrower, the
lodging industry and the economy may result in the establishment of significant
loan loss reserves. At such time as a determination is made that there exists
significant doubt as to the ultimate realization of a loan, the effect on
operating results may be material.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 Compared to the Three Months Ended March 31,
1996
The net income of the Company for the three months ended March 31, 1995 and
1996 was $1.185 million and $1.344 million, or $0.34 and $0.38 per share,
respectively.
Interest income -- loans increased by $689,000, or 62%, from $1.107 million
for the three months ended March 31, 1995 to $1.796 million for the three months
ended March 31, 1996. This increase was primarily attributable to: (i) the
reallocation of the Company's initial investment of the proceeds of the IPO in
cash equivalents and U.S. Government securities to higher-yielding loans to
small businesses, and (ii) portfolio
19
<PAGE> 22
growth from the proceeds of borrowing arrangements. The average invested assets
in loans to small businesses increased by $24.8 million, or 69%, from $36.2
million during the three months ended March 31, 1995, to $61.0 million during
the three months ended March 31, 1996. The annualized average yields on loans
for the three months ended March 31, 1996 and 1995 were approximately 12.1% and
13.1%, respectively. Interest income -- loans includes interest earned on loans,
the accretion of discount on purchased loans (approximately $7,000 and $6,000
during the three months ended March 31, 1996 and 1995, respectively) and the
accretion of deferred commitment fees (approximately $51,000 and $56,000 during
the three months ended March 31, 1996 and 1995, respectively).
Interest and dividends -- other investments decreased by $177,000, or 77%,
from $231,000 during the three months ended March 31, 1995 to $54,000 during the
three months ended March 31, 1996. This decrease was due to the reduction in
funds available for short-term investments as the Company continued to invest
proceeds from the IPO. The proceeds from the IPO were initially invested in
government securities and money market funds until small business loans were
identified and funded. The average outstanding short-term investments of the
Company decreased by $6.8 million, 44%, from $15.3 million during the three
months ended March 31, 1995 to $8.5 million during the three months ended March
31, 1996. The Company had no material short-term investments outstanding during
the quarter ended March 31, 1996 until the completion of the structured
financing in mid-March (see Note 10 to the consolidated financial statements).
The average yields on short-term investments during the three months ended March
31, 1996 and 1995 were approximately 5.6% and 5.8%, respectively.
Other income decreased by $27,000, or 32%, from $84,000 during the three
months ended March 31, 1995 to $57,000 during the three months ended March 31,
1996. Other income consists of: (i) amortization of construction monitoring
fees, (ii) prepayment penalties, (iii) late fees and other loan fees, and (iv)
other miscellaneous collections. The decrease was primarily due to the
prepayment fees collected on a loan during the three months ended March 31, 1995
of $51,000. The decrease was offset by income recognized from the monitoring of
construction hotel/motel projects in process which increased by $7,000 from
$32,000 during the three months ended March 31, 1995 to $39,000 during the three
months ended March 31, 1996.
Expenses consisted primarily of the servicing and advisory fees paid to the
Investment Manager. For additional discussion relating to the components of the
servicing and advisory fees, see "Investment Manager -- Investment Management
Agreement." The operating expenses borne by the Investment Manager include any
compensation to the Company's officers (other than stock options) and the cost
of office space, equipment and other personnel required for the Company's
day-to-day operations. The expenses paid by the Company include transaction
costs incident to the acquisition and disposition of investments, regular legal
and auditing fees and expenses, the fees and expenses of the Company's
Independent Trust Managers, the costs of printing and mailing proxies and
reports to shareholders and the fees and expenses of the Company's custodian and
transfer agent, if any. The Company, rather than the Investment Manager, will
also be required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses. Pursuant to the Investment Management
Agreement, the Company incurred an aggregate of $356,000 in management fees for
the three months ended March 31, 1996. Of the total management fees paid or
payable to the Investment Manager during the three months ended March 31, 1996,
$80,000 has been netted against commitment fees as a direct cost of originating
loans. Investment management fees were $240,000 for the three months ended March
31, 1995. Of the total management fees paid or payable to the Investment Manager
during the three months ended March 31, 1995, $80,000 was netted against
commitment fees as a direct cost of originating loans. The increase in
investment management fees of $116,000 (prior to netting direct costs of
originating loans), or 48%, is primarily due to the average outstanding invested
assets increasing from $35.2 million during the three months ended March 31,
1995 to $60.6 million during the three months ended March 31, 1996 (a $25.4
million increase, or 72%) and average total assets increasing from $51.4 million
during the three months ended March 31, 1995 to $66.2 million during the three
months ended March 31, 1996 (a $15.0 million increase, or 29%).
Legal and accounting fees decreased by $17,000, or 65%, from $26,000 during
the three months ended March 31, 1995, to $9,000 during the three months ended
March 31, 1996. This decrease is attributable to billing of accounting and
corporate legal fees during the three months ended March 31, 1995.
20
<PAGE> 23
General and administrative expenses decreased by $8,000, or 24%, from
$33,000 during the three months ended March 31, 1995 to $25,000 during the three
months ended March 31, 1996. This decrease is primarily attributable to the cost
of printing and mailing the Company's dividend reinvestment plan and the cost of
listing of the Company's common shares of beneficial interest on the American
Stock Exchange during the three months ended March 31, 1995.
Interest expense of $252,000 relates to interest and non-utilization
charges on the Company's revolving credit facility (approximately $136,000),
interest on the structured financing (approximately $105,000) and interest
incurred on borrower advances (approximately $11,000) during the three months
ended March 31, 1996. The obligation to pay interest on borrower advances is
included in borrower advances on the accompanying balance sheet. The Company did
not have any outstanding borrowings during the three months ended March 31,
1995. Interest on borrower advances was $16,000 during the three months ended
March 31, 1995.
Year Ended December 31, 1994 Compared to the Year Ended December 31, 1995
The net income of the Company for the years ended December 31, 1994 and
1995 was $3.2 million and $4.9 million, or $0.93 per share and $1.42 per share,
respectively.
Interest income -- loans increased by $3.3 million, or 143%, from $2.3
million for the year ended December 31, 1994 to $5.6 million for the year ended
December 31, 1995. This increase was primarily attributable to the reallocation
of the Company's initial investment of the proceeds of the IPO from cash and
U.S. Government securities to higher-yielding loans to small businesses. The
average invested assets increased by $27.9 million, or 148%, from $18.9 million
during the year ended December 31, 1994 to $46.8 million during the year ended
December 31, 1995. The average yields on loans for the years ended December 31,
1995 and 1994 were approximately 12.1% and 13.2%, respectively. Interest
income -- loans includes interest earned on loans, the accretion of discount on
purchased loans (approximately $26,000 and $22,000 during the years ended
December 31, 1995 and 1994, respectively) and the accretion of deferred
commitment fees (approximately $197,000 and $166,000 during the years ended
December 31, 1995 and 1994, respectively).
Interest and dividends -- other investments decreased by $875,000, or 73%,
from $1.2 million during the year ended December 31, 1994 to $325,000 during the
year ended December 31, 1995. This decrease was due to the reduction in funds
available for short-term investments as the Company began making loans from the
proceeds of the IPO. The proceeds from the IPO were initially invested in
government securities and money market funds until Primary Investments were
identified and funded. The average short-term investments of the Company
decreased by $25.2 million, or 81%, from $31.2 million during the year ended
December 31, 1994 to $6.0 million during the year ended December 31, 1995. The
average yields on short-term investments during the years ended December 31,
1995 and 1994 were approximately 5.5% and 3.9%, respectively.
Other income increased by $115,000, or 64%, from $180,000 during the year
ended December 31, 1994 to $295,000 during the year ended December 31, 1995.
Other income consists of: (i) amortization of construction monitoring fees, (ii)
prepayment penalties, (iii) late fees and other loan fees, and (iv) other
miscellaneous collections. The increase was primarily due to construction
hotel/motel projects in process increasing causing an increase of $111,000 in
construction monitoring fees recognized as income from $35,000 during the year
ended December 31, 1994 to $146,000 during the year ended December 31, 1995.
Expenses consisted primarily of the servicing and advisory fees paid to PMC
Advisers. For additional discussion relating to the components of the servicing
and advisory fees, see "Investment Manager -- Investment Management Agreement."
The operating expenses borne by the Investment Manager, none of which is
allocated to the Company, include any compensation to the Company's officers
(other than stock options) and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses paid by
the Company include transaction costs incident to the acquisition and
disposition of investments, regular legal and auditing fees and expenses, the
fees and expenses of the Company's Independent Trust Managers, the costs of
printing and mailing proxies and reports to shareholders and the fees and
expenses of the Company's custodian and transfer agent, if any. The Company,
rather than the Investment Manager, will also be required to pay expenses
associated with any litigation and other
21
<PAGE> 24
extraordinary or nonrecurring expenses. Pursuant to the Investment Management
Agreement, the Company incurred an aggregate of $1,189,000 in management fees
for the year ended December 31, 1995. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1995,
$244,000 has been netted against commitment fees as a direct cost of originating
loans. Investment management fees were $429,000 for the year ended December 31,
1994. No advisory fees for the six month period ended June 30, 1994 were due to
the Investment Manager. Of the advisory and servicing fees paid or payable to
the Investment Manager during the year ended December 31, 1994, $71,500 was
netted against commitment fees as a direct cost of originating loans. The
increase in investment management fees of $760,000 (prior to netting direct
costs of originating loans), or 177%, is primarily due to the increase in the
average invested assets increasing from $18.9 million to $46.8 million and
average total assets increasing from $49.0 million to $53.9 million.
Legal and accounting fees increased by $38,000, or 115%, from $33,000
during the year ended December 31, 1994 to $71,000 during the year ended
December 31, 1995. This increase is attributable to higher accounting expenses
and corporate legal fees attributed to the increased corporate activity.
General and administrative expenses increased by $32,000, or 50%, from
$64,000 during the year ended December 31, 1994 to $96,000 during the year ended
December 31, 1995. This increase is primarily attributable to (i) shareholder
servicing fees incurred during the year ended December 31, 1995 for dividend
payments, (ii) the cost of printing and mailing the Company's dividend
reinvestment plan and annual reports, and (iii) the cost of listing the Common
Shares on the American Stock Exchange.
Interest expense of $222,000 relates to interest and non-utilization
charges on the revolving credit facility (approximately $171,000) and interest
incurred on borrower advances (approximately $51,000) during the year ended
December 31, 1995. The interest payable at December 31, 1995, of $56,267
pertained to interest incurred on the outstanding balance of the revolving
credit facility. The obligation to pay interest on borrower advances is included
in borrower advances on the accompanying balance sheet.
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.
CASH FLOW ANALYSIS
The Company generated $3.8 million and $6.6 million from operating
activities during the years ended December 31, 1995 and 1994, respectively. The
decrease of $2.8 million, or 42%, was primarily due to fluctuations in borrowers
advances (decreased $4.1 million from a source of $2.3 in 1994 to a use of $1.8
million in 1995). During 1994, as many construction projects were in the initial
stages, the borrowers were required to submit their required advances. Since
1994 was the first full year of operations, there was no reimbursement activity
for prior years advances and consequently 1994 had a significant positive cash
flow from borrower advances. During 1995, many of the construction projects were
significantly completed, with the result being a net reduction in outstanding
borrower advances at December 31, 1995. See "Business -- Borrower Advances." Net
income increased $1.7 million, or 53%, from $3.2 million during the year ended
December 31, 1994 to $4.9 million during the year ended December 31, 1995. Cash
used for advances to affiliates increased by $500,000, from $160,000 at December
31, 1994 to $660,000 at December 31, 1995. The increase was a result of the
annual fee payable pursuant to the Investment Management Agreement increasing in
1995 due to the larger base of invested assets and achieving the target to earn
the full incentive fee, with such fee payable in 1996.
The Company used $26.7 million and $25.1 million through investing
activities during the years ended December 31, 1995 and 1994, respectively. As
lending is the Company's primary source of business, loans funded/purchased is
the main reason for these uses. Loans funded/purchased were $31.7 million during
the year ended December 31, 1995 as compared to $35.0 million for the year ended
December 31, 1994, a 9% decrease. This decrease was due to the amount of
construction projects in process during 1995, whereas these projects utilize the
Company's funds available for commitment, the actual funding process occurs over
a period of time. During 1994, most of the amounts loaned related to the
acquisition or refinance of lodging properties.
22
<PAGE> 25
The Company generated $4.3 million and $2.3 million from financing
activities during the years ended December 31, 1995 and 1994, respectively.
During 1994, the main source of funds was $5.2 million received from the
exercise of the over-allotment option in connection with the IPO. During 1995,
the main source of funds was $7.9 million of net proceeds from advances under
the Company's revolving credit facility. The Company's main use of funds from
financing activities is the payment of dividends as a part of its requirements
to maintain REIT status. Dividends paid increased from $2.5 million during the
year ended December 31, 1994 to $4.3 million during the year ended December 31,
1995. This increase of $1.8 million corresponds to the Company's increase in net
income.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans and, from time
to time, to acquire loans from certain governmental agencies and/or their
agents. The Company also uses funds for payment of dividends to shareholders,
management and advisory fees (in lieu of salaries and other administrative
overhead), general corporate overhead and interest and principal payments on
borrowed funds.
At March 31, 1996, the Company had approximately $17.0 million of cash and
cash equivalents and approximately $35.7 million in outstanding commitments to
originate loans. Such commitments were made in the ordinary course of the
Company's business. These commitments to extend credit are conditioned upon
compliance with the terms of the commitment letter. Commitments have fixed
expiration dates and require payment of a fee. Since some commitments expire
without the proposed loan closing, the total committed amounts do not
necessarily represent future cash requirements. In general, to meet its
liquidity requirements, including expansion of its outstanding loan portfolio,
the Company intends to use: (i) its short-term revolving credit facility
described below, (ii) placement of long-term borrowings, (iii) issuance of debt
securities, and/or (iv) offering of additional equity securities, including the
Offering. Pursuant to the Investment Management Agreement, if the Company does
not have available capital to fund outstanding commitments, the Investment
Manager will refer such commitments to affiliates of the Company. The ability of
the Company to meet its liquidity needs will depend on its ability to borrow
funds or issue equity securities on favorable terms.
By December 31, 1995, the Company had fully utilized the proceeds from the
IPO. During 1995, the Company completed an arrangement for a revolving credit
facility providing the Company with funds to originate loans collateralized by
commercial real estate. This credit facility provides the Company up to the
lesser of $20 million or an amount equal to 50% of the value of the underlying
property collateralizing the borrowings. At March 31, 1996, the Company had no
outstanding borrowings under the credit facility and $20 million available
thereunder. The Company is charged interest on the balance outstanding under the
credit facility at the Company's election of either the prime rate of the lender
less 50 basis points or 200 basis points over the 30, 60 or 90 day LIBOR.
Additional funds will be available to the Company from the proceeds of the
dividend reinvestment plan or SBA 504 loan takeouts. Management anticipates
these sources of funds will be adequate to meet its existing obligations.
On March 12, 1996, a special purpose affiliate of the Company, PMC
Commercial Receivable Limited Partnership, a Delaware limited partnership (the
"Partnership"), completed a private placement (the "Private Placement") of
$29,500,000 of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes").
The Company owns, directly or indirectly, all of the partnership interests of
the Partnership. The Notes, which were issued at par, mature in 2016 and bear
interest at the rate of 6.72% per annum and are secured by approximately $39.7
million of loans contributed by the Company to the Partnership, of which the
Company owns a 99% limited partnership interest. The loans were originated or
purchased by the Company in accordance with the Company's lending strategy and
underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to the
Company or its assets in the event of nonpayment, other than the mortgage loans
securing the Notes. The net proceeds from this issuance of the Notes
(approximately $27.1 million after giving effect to issuance costs of $500,000
and the establishment of a $1.9 million deposit held by the trustee as
collateral) were distributed to the Company in accordance with its partnership
interest in the Partnership. The Company used approximately $10.3 million of
such proceeds to pay down outstanding borrowings under the Company's credit
facility and
23
<PAGE> 26
intends to make additional loans in accordance with its lending criteria with
the remaining proceeds. In connection with the Private Placement, the Notes
received a "AA" rating from Duff & Phelps Credit Rating Co.
In general, if the returns on loans originated by the Company with funds
obtained from any borrowing or the issuance of any Preferred Shares fail to
cover the cost of such funds, the net cash flow on such loans will be negative.
Additionally, any increase in the interest rate earned by the Company on
investments in excess of the interest rate or dividend rate incurred on the
funds obtained from either borrowings or the issuance of Preferred Shares would
cause its net income to increase more than it would without the leverage.
Conversely, any decrease in the interest rate earned by the Company on
investments would cause net income to decline by a greater amount than it would
if the funds had not been obtained from either borrowings or the issuance of
Preferred Shares. Leverage is thus generally considered a speculative investment
technique. See "Risk Factors -- Leverage."
Loan demand has remained high for the types of loans originated by the
Company (see "Business -- Loan Commitments"). The Private Placement may not
provide the Company with sufficient capital to expand the outstanding portfolio
at historical levels. Accordingly, during the year ending December 31, 1996, the
Company may seek additional sources for financing, including the Offering. There
can be no assurance that the Company will be able to raise funds through these
financing sources. If these sources are not available, the Company will have to
fully utilize its $20 million revolving credit facility and may have to slow the
rate of increasing the outstanding loan portfolio.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1992, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair
Value of Financial Instruments," to require disclosure in the body of the
financial statements or the accompanying notes regarding the fair value of
financial instruments for which it is practicable to estimate that value and the
methods and significant assumptions used. The effective date is for financial
statements issued in fiscal years ending after December 15, 1995. The Company
has incorporated the requirements of SFAS No. 107 in the accompanying financial
statements.
In 1993, FASB issued SFAS No. 114 "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures." These pronouncements are effective
for fiscal years beginning after December 15, 1994. These statements provide
income recognition criteria for loans and generally require creditors to value
certain impaired and restructured loans at the present value of the expected
future cash flows, discounted at the loan's effective interest rate, or at fair
value of the collateral if the loan is collateral dependent.
The implementation of SFAS No. 114 and SFAS No. 118 did not have an effect
on the Company's financial statements.
In 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employee" (APB No. 25) or to recognize compensation expense for
grants of stock, stock options, and other equity instruments to employees based
on fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earnings per
share as if the fair value based accounting prescribed by SFAS No. 123 has been
applied. The Company has elected to continue expense recognition pursuant to APB
No. 25. SFAS No. 123 is effective for fiscal years beginning after December 15,
1995.
24
<PAGE> 27
BUSINESS
GENERAL
The Company is a commercial lender that originates loans to small business
enterprises which are primarily collateralized by first liens on real estate.
The Company principally lends to small businesses in the lodging industry and
also targets the commercial real estate, service, retail and manufacturing
industries. The Company was formed in June 1993 as a REIT pursuant to the Texas
Real Estate Investment Trust Act (the "Texas REIT Act"). The Company's
investments are managed pursuant to the Investment Management Agreement with PMC
Advisers, a wholly-owned subsidiary of PMC Capital and an affiliate of the
Company.
Although the Company, PMC Advisers and PMC Capital are separate entities,
the management team of all three entities is the same, which provides
significant underwriting benefits to the Company. The loans funded by the
Company have many of the same characteristics as the loans typically originated
by PMC Capital and the underwriting criteria for such loans is similar to the
underwriting criteria typically required by PMC Capital (other than with respect
to loan amounts and SBA eligibility requirements). Consequently, the Company
believes that the experience of the officers of PMC Advisers in originating
loans for PMC Capital benefits the Company.
The Company also expects to continue to benefit from the established
customer base of PMC Capital, particularly those customers with a strong credit
profile. The Company benefits from the in-house referral system which is
presently in place at PMC Capital utilizing the existing marketing efforts
available through PMC Advisers. Many of the Company's existing and potential
borrowers have other projects that are currently financed by PMC Capital. These
borrowers' financing needs have grown over time and now exceed the limitations
set for SBA approved loan programs. These borrowers generally have greater
financial strength and stability than those targeted for SBA loan programs.
BUSINESS STRATEGY
The Company's principal business objective is to maximize shareholder
returns by expanding its loan portfolio while adhering to its underwriting
criteria. The Company currently has three principal strategies to achieve this
objective. First, the Company expects to continue to benefit from the
established customer base of PMC Capital due to the referral system available
through PMC Advisers. Many of the Company's existing and potential borrowers
have other projects that are currently financed by PMC Capital; however, their
borrowers' financing needs have grown over time and now exceed the limitations
set for SBA approved loan programs. These borrowers generally have financial
strength and stability in excess of the SBA loan program criteria and represent
continuing lending opportunities. See "-- SBA Regulations." Second, the Company
is seeking to expand its relationship with national hotel and motel franchisors
to secure a consistent flow of lending opportunities for the Company. For
example, on April 12, 1996, the Company entered into a marketing agreement with
USFS whereby USFS, through its wholly-owned subsidiary, Microtel, will present
and market to prospective Microtel franchisees the Company's current financing
programs. All fees payable to USFS pursuant to the marketing agreement will be
paid by the Investment Manager, and the Company will have no obligation with
respect thereto. The third principal strategy of the Company is to continue to
obtain cost-effective financing to maximize its growth. On March 12, 1996, the
Company completed a private placement of $29,500,000 of Notes through the
Partnership, a special purpose affiliate of the Company. The Company owns,
directly or indirectly, all of the interests in the Partnership. In connection
with the private placement, the Notes received a "AA" rating from Duff & Phelps
Credit Rating Co.
UNDERWRITING CRITERIA AND LOAN ORIGINATIONS
Underwriting Criteria. The Company primarily originates loans to small
businesses that (i) exceed the net worth, asset, income, number of employees or
other limitations applicable to the SBA programs utilized by PMC Capital, (ii)
require funds in excess of $1.1 million without regard to SBA eligibility
requirements, or (iii) require funds which PMC Capital does not have available
and which otherwise meet the Company's underwriting criteria. Such loans
("Primary Investments") are primarily collateralized by first liens on real
25
<PAGE> 28
estate of the related business, personally guaranteed by the principals of the
entities obligated on the loans and are subject to the Company's underwriting
criteria.
The underwriting criteria applied by the Company to evaluate prospective
borrowers generally requires such borrowers to (i) provide first-lien real
estate mortgages not exceeding 70% of the lesser of appraised value or cost,
(ii) provide proven management capabilities, (iii) meet certain criteria with
respect to historical or projected debt coverage, and (iv) have principals with
satisfactory credit histories and provide personal guarantees, as applicable.
Pursuant to management's policies, at least 75% of the Company's assets
must be utilized to fund the Primary Investments. Through March 31, 1996, the
Company had utilized 98% of its invested assets to fund the Primary Investments.
In addition, the Company may utilize a maximum of 25% of its assets to (i)
purchase from certain governmental agencies and other sellers, loans on which
payments are current at the time of the Company's commitment to purchase such
loans and which meet the Company's underwriting criteria, (ii) invest in other
commercial loans secured by real estate, and (iii) invest in real estate,
provided such investments do not affect the ability of the Company to maintain
its qualification as a REIT under the Code. Management of the Company has broad
discretion in evaluating and pursuing investment opportunities.
Loan Originations. As of March 31, 1996, 96% of the Primary Investments
have been to small business owners in the lodging industry. In addition, the
Company may lend to small business owners in the commercial real estate,
service, retail and manufacturing industries. The Company operates from the
existing offices of the Investment Manager in Texas, Florida and Georgia and
management anticipates that the Company will conduct operations from any future
office of the Investment Manager. The Investment Manager receives loan referrals
from PMC Capital and solicits loan applications on behalf of the Company from
borrowers through personal contacts, attendance at trade shows, meetings and
correspondence with local chambers of commerce, direct mailings, advertisements
in trade publications and other marketing methods. The Company is not
responsible for any compensation to PMC Capital for referrals. In addition, the
Company receives a significant percentage of loans generated through referrals
from lawyers, accountants, real estate brokers, loan brokers and existing
borrowers. In some instances, the Company may make payments to non-affiliated
individuals who assist in generating loan applications, with such payments
generally not exceeding 1% of the principal amount of the loan. Through March
31, 1996, the Company had not made or committed to any such payment.
The Investment Manager, PMC Capital and the Company have entered into the
Loan Origination Agreement to address conflicts of interest regarding the loan
origination function. The Loan Origination Agreement generally requires that
loans which meet the Company's underwriting criteria be funded by the Company
provided that funds are available. In such event, loans generally will not be
made by PMC Capital other than: (i) loans in an original principal amount not
exceeding $1.1 million which qualify for the SBA Section 7(a) or SBIC loan
programs utilized by its subsidiaries and (ii) bridge loans to be refinanced by
SBA Section 7(a) upon approval of the SBA loan application. Generally, the
Company originates loans to borrowers who exceed one or more of the limitations
applicable to the SBA Section 7(a) and SBIC loan programs utilized by PMC
Capital's subsidiaries. See "-- SBA Regulations." The Company will not originate
loans in principal amounts less than $1.1 million which qualify for SBA Section
7(a) or SBIC loan programs unless PMC Capital is unable to originate such loans
because of insufficient available capital.
All prospective Primary Investments are considered by the Investment
Manager for investment by the Company. In the event that the Company does not
have funds available, origination opportunities presented to the Company may be
originated by PMC Capital or its subsidiaries.
Upon receipt of a completed loan application, the Investment Manager's
credit department (which is also the credit department of PMC Capital) conducts
an analysis of the loan which may include either a third-party appraisal or
valuation by the Investment Manager of the property collateralizing the loan to
assure compliance with loan-to-value ratios, a site inspection generally by a
member of senior management of the Investment Manager, a review of the
borrower's business experience and credit history and an analysis of debt
service coverage and debt-to-equity ratios.
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<PAGE> 29
The Investment Manager's loan committee (which is also the loan committee
of PMC Capital), which is comprised of members of the Company's senior
management, makes a determination with respect to each loan application. The
Investment Manager's loan committee generally meets on a daily basis and either
approves the loan application as submitted, approves the loan application
subject to additional conditions or rejects the loan application. After a loan
is approved, the credit department will prepare and submit to the borrower a
good faith estimate and cost sheet detailing the anticipated costs of the
financing. The closing department reviews the loan file and assigns the loan to
the Company's counsel, the fees of whom are paid by the borrower. Prior to any
funding of a loan, the closing department is provided with the loan
documentation from the closing attorney which is reviewed prior to authorizing
disbursement.
After a loan is closed, the Investment Manager's servicing department
(which is also the servicing department of PMC Capital) is responsible on an
ongoing basis for: (i) obtaining all financial information required by the loan
documents, (ii) verifying that adequate insurance remains in effect, (iii)
refiling Uniform Commercial Code financing statements evidencing the loan, if
required, (iv) collecting and applying loan payments, and (v) monitoring
delinquent accounts.
LOAN PORTFOLIO CHARACTERISTICS
As a result of the application of the Company's underwriting criteria, the
Company's loan portfolio has the following characteristics:
(i) All loans used by borrowers to acquire real estate and/or construct
improvements thereon (the "Real Estate Loans") are secured by first
liens on business real property. Each of the related loans used to
acquire furniture, fixtures and equipment for certain of such real
estate (the "FFE Loans") is secured by a first lien on the furniture,
fixtures and equipment acquired with the proceeds of such loan and by
a second lien on the real property of the borrower under the related
Real Estate Loans. Other additional properties of certain borrowers or
guarantors have been used as additional collateral in some instances.
(ii) All originated loans are guaranteed by the principal(s) of the
borrowers.
(iii) The loan amounts of Real Estate Loans (together with related FFE
Loans) are generally equal to or less than 70% of the fair value or
cost of the primary collateral. When necessary, credit enhancements,
such as additional collateral, are obtained to assure a maximum of
70% loan to value ratio.
The Company's loan portfolio also has the following characteristics:
a. At March 31, 1996, the Company had 66 loans outstanding with an
aggregate principal amount outstanding of $64,048,000.
b. At March 31, 1996, all loans were paying as agreed, and none of the
loans was 30 days or more delinquent.
c. Borrowers are principally involved in the lodging industry (96% as of
March 31, 1996). The remainder of the loan portfolio is comprised of
two loans in the commercial office rental market.
d. The Company has not loaned more than 10% of its assets to any single
borrower.
e. At March 31, 1996, the outstanding principal amounts of the Real
Estate Loans ranged from approximately $300,000 to $2.5 million and
the outstanding principal amounts of FFE Loans ranged from
approximately $57,000 to $312,000.
f. All originated loans provide for interest payments at fixed rates.
g. All originated loans, other than loans made under the SBA Section 504
program (the "Program"), have original maturities ranging from five
to 20 years which may be extended, subject to certain conditions, by
mutual agreement of the Company and the borrower until the loan is
fully amortized if the original maturity date of the loan is
prior to the stated maturity.
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<PAGE> 30
h. Originated loans, other than Program loans, provide for scheduled
amortization (ranging from six to 20 years). Substantially all Real
Estate Loans have balloon payment requirements (which may be extended at
maturity, subject to certain conditions, by mutual agreement of the
Company and the Borrower) and entitle borrowers to prepay all or part of
the principal amount, subject to a prepayment penalty.
i. At March 31, 1996, the weighted average maturity for the Company's
portfolio of loans was approximately six years.
LOAN PORTFOLIO
From June 4, 1993 (date of inception) through March 31, 1996, the Company
originated or purchased 76 loans in an aggregate principal amount of
approximately $75 million. The weighted average interest rate for the Company's
portfolio of loans outstanding as of March 31, 1996 was 11.2%.
All loans are paying as agreed. From inception through March 31, 1996, the
Company experienced no loan losses and no charge-offs.
All loans originated by the Company provide for fixed interest rates. The
weighted average interest rate for loans funded in the period from commencement
of operations (December 28, 1993) to December 31, 1993, the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996 were 11.50%, 11.05%,
11.42% and 11.02%, respectively. The following table sets forth the interest
rates charged under the Company's portfolio for the loans originated for the
period from inception to December 31, 1993 and the years ended December 31, 1994
and December 31, 1995 and the three months ended March 31, 1996:
INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTEREST RATES
------------------------------------------------------------------------
PERIOD ORIGINATED 10.00-10.49% 10.50-10.99% 11.00-11.49% 11.50-11.99% 12.00-12.25% TOTAL
- -------------------------- ------------ ------------ ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31,
1993(1)................. $ -- $ -- $ -- $ 3,216 $ -- $ 3,216
Year ended December 31,
1994.................... -- 19,181 4,263 10,083 131 33,658
Year ended December 31,
1995.................... -- 3,562 8,469 19,459 221 31,711
Three months ended March
31, 1996................ 1,700 216 702 2,212 -- 4,830
------ -------- -------- -------- ---- -------
Total........... $1,700 $ 22,959 $ 13,434 $ 34,970 $352 $73,415
====== ======== ======== ======== ==== =======
Percentage of Portfolio... 2.3% 31.3% 18.3% 47.6% 0.5% 100.00%
====== ======== ======== ======== ==== =======
</TABLE>
- ---------------
(1) The Company commenced operations on December 28, 1993.
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<PAGE> 31
All loans originated by the Company (other than Program loans) are
guaranteed by the principal(s) of the borrowers and have original maturities
ranging from five to 20 years, which may be extended, subject to certain
conditions, by the mutual consent of the Company and the borrower until the loan
is fully amortized. The following table sets forth the amortization terms for
the loans in the Company's portfolio as of March 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OUTSTANDING PERCENT OF
AMORTIZATION TERM OF LOANS (IN THOUSANDS) PORTFOLIO
- ---------------------------------------------------------- -------- -------------- ----------
<S> <C> <C> <C>
10 years or fewer......................................... 9 $ 2,642 4.1%
11 to 20 years............................................ 55 59,928 93.6%
21 to 30 years............................................ 2 1,478 2.3%
--
-------- ------
Total........................................... 66 $ 64,048 100.0%
== ======== ======
</TABLE>
The Company lends primarily to borrowers involved in the lodging industry.
As of March 31, 1996, 96% of the Company's loan portfolio consisted of loans for
the acquisition, renovation and construction of hotels. As of March 31, 1996,
Days Inn and Holiday Inn franchisees accounted for 20.3% and 18.5%,
respectively, of the Company's outstanding loan portfolio.
The following table sets forth a breakdown of the Company's loan portfolio
at March 31, 1996 to borrowers involved in the hotel (national franchises and
independent hotels) and commercial real estate industries:
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
NO. OF OUTSTANDING OF
LOANS (IN THOUSANDS) PORTFOLIO
------ -------------- ----------
<S> <C> <C> <C>
Days Inn............................................ 11 $ 13,015 20.3%
Holiday Inn(1)...................................... 12 11,817 18.5%
Ramada Inn.......................................... 4 5,988 9.4%
Best Western(2)..................................... 6 5,378 8.4%
Comfort Inn(3)...................................... 7 5,133 8.0%
Hampton Inn(4)...................................... 4 4,126 6.4%
Econolodge(5)....................................... 3 3,284 5.1%
Howard Johnsons(6).................................. 3 3,283 5.1%
Quality Inn(7)...................................... 3 2,441 3.8%
Super 8............................................. 3 1,506 2.4%
Knights Inn......................................... 1 645 1.0%
Sleep Inn........................................... 1 216 0.3%
-- -------- ------
Total of Franchise Affiliates............. 58 56,832 88.7%
Independent Hotels.................................. 6 4,669 7.3%
Commercial Real Estate.............................. 2 2,547 4.0%
-- -------- ------
Total............................................... 66 $ 64,048 100.0%
== ======== ======
</TABLE>
- ---------------
(1) Represents (i) five loans originated for Holiday Inn franchises with
$5,894,776 principal outstanding which represents 9.2% of the loan
portfolio, including one FFE Loan of $180,270, and (ii) seven loans
originated for Holiday Inn Express franchisees with $5,921,899 principal
outstanding which represents 9.2% of the loan portfolio, including one FFE
Loan of $56,704.
(2) Includes one FFE Loan of $311,694.
(3) Represents (i) six loans originated for Comfort Inn franchisees with
$4,021,438 principal outstanding which represents 6.3% of the loan
portfolio, including one SBA Section 504 program loan of $517,513 and one
FFE Loan of $104,794, and (ii) one loan originated for a Comfort Inn Suite
franchisee with $1,111,358 principal outstanding which represents 1.7% of
the loan portfolio.
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<PAGE> 32
(4) Includes one FFE Loan of $117,335.
(5) Includes one Program loan of $700,000.
(6) Includes one FFE Loan of $60,000.
(7) Includes one Program loan of $593,665.
The following table sets forth the aggregate amount of loans originated or
purchased for each quarter for the periods indicated:
LOANS ORIGINATED OR PURCHASED BY QUARTER(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- ------
<S> <C> <C> <C>
First Quarter.......................................... $ 7,039 $ 9,328 $4,830
======
Second Quarter......................................... 13,594 11,110
Third Quarter.......................................... 6,471 4,441
Fourth Quarter......................................... 7,879 6,832
------- -------
$34,983 $31,711
======= =======
</TABLE>
- ---------------
(1) The Company commenced operations on December 28, 1993 and funded a $3.2
million loan in the period from commencement of operations through December
31, 1993.
The following table sets forth the amount of the Company's loans originated
and repaid for the period and years indicated:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4,
1993 THREE
(DATE OF MONTHS
INCEPTION) YEARS ENDED ENDED
TO DECEMBER 31, MARCH
DECEMBER 31 ------------------- 31,
1993(1) 1994 1995 1996
----------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable -- beginning of
period................................. $ -- $ 3,119 $32,694 $59,130
Loans originated or purchased............ 3,216 34,983 31,711 4,830
Loan repayments(2)....................... -- (4,862) (4,992) (1,015)
Other adjustments(3)..................... (97) (546) (283) 13
------- ------- ------- -------
Loans receivable -- end of period........ $ 3,119 $32,694 $59,130 $62,958
======= ======= ======= =======
</TABLE>
- ---------------
(1) The Company commenced operations on December 28, 1993.
(2) Includes the payoff on certain SBA 504 loans and prepaid loans.
(3) Includes effect of amortization of loans purchased at a discount and
commitment fees collected which are accounted for in accordance with SFAS
No. 91.
LENDING ACTIVITIES
During the years ended December 31, 1994 and 1995, and the three months
ended March 31, 1996, the Company originated loans to 38, 31 and 4 corporations,
partnerships or individuals. During the years ended December 31, 1994 and 1995
and the three months ended March 31, 1996, the Company funded approximately
$33.6, $31.7 and $4.8 million and collected commitment fees of approximately
$1.3 million, $546,000 and $262,000, respectively.
The Company purchased two loans with a face value of $1,502,005 for
$1,325,113 from certain governmental agencies during the year ended December 31,
1994. The discount of $176,892 is netted against loans receivable and is being
amortized over the remaining life of the loans. During the years ended
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<PAGE> 33
December 31, 1994 and 1995, and the three months ended March 31, 1996,
approximately $22,000, $26,000 and $7,000, respectively, of the discount was
recognized as interest income. Subsequent to December 31, 1994, the Company has
purchased no loans.
Approximately 31% and 11% of the Company's loan portfolio as of March 31,
1996 consisted of loans to borrowers in Texas and Maryland, respectively.
Approximately 32% and 12% of the Company's loan portfolio as of December 31,
1995 consisted of loans to borrowers in Texas and Maryland, respectively. No
other state had a concentration of 10% or greater during either period. The
Company's loan portfolio was approximately 96%, concentrated in the lodging
industry at both December 31, 1995 and March 31, 1996.
When originating a loan, the Company charges a commitment fee. In
accordance with SFAS No. 91, this non-refundable fee, less direct costs
associated with the origination, is deferred and included as a reduction of the
carrying value of loans receivable. These net deferred commitment fees are being
recognized as an adjustment of yield over the life of the related loan. The
Company had $664,962, $974,971 and $968,699 in net unamortized deferred
commitment fees at December 31, 1994 and 1995, and March 31, 1996, respectively.
DELINQUENCY AND COLLECTIONS
To date, the Company has had only one loan delinquent for longer than 30
days. Such loan was current as of March 31, 1996. If a borrower fails to make a
required monthly payment, the borrower will generally be notified by mail after
ten days. If the borrower has not made full payment within ten days, a late fee
is assessed. If the borrower has not responded or made full payment within 20
days after the loan becomes delinquent, a second notification letter will be
sent. Following such notification, a collection officer will initiate telephone
contact. If the borrower has not responded or made full payment within 30 days
after the loan becomes delinquent, a third notification letter will be sent and
follow-up telephone contact will be made by the collection officer. In the event
a borrower becomes 45 days delinquent, a ten day demand letter will be sent to
the borrower requiring that the loan be brought current within ten days. After
the expiration of such ten day period, the Company may proceed with legal
action. The Company's policy with respect to loans in arrears as to interest
payments for periods in excess of 60 days is to generally discontinue the
accrual of interest income on such loans. The Company will deliver a default
notice and begin foreclosure and liquidation proceedings when it determines that
pursuit of these remedies is the most appropriate course of action. The Company
continually monitors loans for possible exposure to loss. In its analysis, the
Company reviews various factors, including the value of the collateral securing
the loan and the borrower's payment history. Based upon this analysis, a loan
loss reserve will be established on a case by case basis. Through March 31,
1996, no loan loss reserve had been established.
SBA SECTION 504 PROGRAM
The Company participates as a private lender in the Program. Participation
in the Program offers an opportunity to enhance the credit status of loans. The
Program provides assistance to small business enterprises in obtaining
subordinate long-term financing by guaranteeing debentures available through
certified development companies ("CDCs") for the purpose of acquiring land,
buildings, machinery and equipment and for modernizing, renovating or restoring
existing facilities and sites. A typical finance structure for a Program project
would include a first mortgage covering 50% of the project cost from a private
lender such as the Company, a second mortgage obtained through the Program
covering up to 40% of the project cost and a contribution of at least 10% of the
project cost by the principals of the small business enterprise being assisted.
The Company generally requires at least 15% of the equity in a project to be
contributed by the principals of the borrower as well as guarantees of the
principals. The first mortgage is not guaranteed by the SBA. Although the total
size of projects utilizing the Program guarantees are unlimited, the maximum
amount of subordinated debt in any individual project generally is $750,000 (or
$1 million for certain projects). Typical projects range in size from $500,000
to $2.5 million. A business eligible for financing pursuant to the Program must:
(i) be a for-profit corporation, partnership or proprietorship, (ii) not exceed
$6 million in net worth, and (iii) not exceed $2 million in average net income
(after Federal income taxes) for each of the previous two years. Financing
pursuant to the Program cannot be used for working capital or
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<PAGE> 34
inventory, consolidating or repaying debt or financing a plant not located in
the U.S. or its possessions. As of March 31, 1996, the Company had $1,811,000
outstanding which is anticipated to be paid off by permanent subordinated
financing provided by the Program.
U.S. FRANCHISE SYSTEMS, INC. AGREEMENT
On April 12, 1996, the Company entered into a marketing agreement (the
"Marketing Agreement") with U.S. Franchise Systems, Inc., a Delaware corporation
("USFS"), whereby USFS, through its wholly-owned subsidiary, Microtel Inns and
Suites Franchising, Inc. ("Microtel"), will present and market to prospective
Microtel franchisees the Company's current financing programs along with other
financing options. Microtel offers franchises for the establishment and
operation of a line of economy lodging facilities known as "Microtel Inns,"
"Microtel Inns & Suites" and "Microtel Suites" (collectively referred to as the
"Microtel Inns"). The Microtel Inns are designed to appeal to the traveling
public interested in low cost accommodations and basic lodging facilities.
Under the Marketing Agreement, Microtel would refer prospective franchisees
of Microtel Inns directly to the Company as a potential lending source in
connection with the acquisition and construction of a Microtel Inn. Utilizing
its standard underwriting criteria and credit review process, the Company would
evaluate each prospective franchisee prior to originating a loan. Under the
Marketing Agreement, the Company is under no obligation to originate a loan to
prospective franchisee of Microtel. Certain senior officers of Oppenheimer &
Co., one of the Representatives of the Underwriters, are investors in USFS for
their personal accounts.
USFS will generally deposit 2% of each loan commitment made under the
Marketing Agreement with the Company into a reserve account (the "Reserve
Account"), with a minimum Reserve Account balance of $100,000, to collateralize
the payment and performance of such loans and pay losses, if any, suffered by
the Company on uncollected loans. To the extent that the reserve amount exceeds
the amount required, such excess amount would be remitted by the Company to USFS
each quarter. Under the Marketing Agreement, all fees payable to USFS will be
paid by the Investment Manager and the Company will have no obligation with
respect thereto.
OTHER INVESTMENTS
The Company has purchased from certain governmental agencies two loans
secured by first liens on real estate at a discount. The Investment Manager
selected and evaluated such loans using substantially the same underwriting
criteria applicable to originated loans. When purchasing loans from governmental
agencies, underwriting information received by the Investment Manager, such as
loan applications, financial statements, property appraisals and other loan
documentation that was developed by the original lending institution, may be
outdated. In such cases, the Investment Manager will seek to supplement this
information with additional data such as credit reports on borrowers,
geographical analysis, industry demographics, economic data and, in selected
cases, current property appraisals or site visits. Prohibitions by sellers
against contacting borrowers might limit the Investment Manager's ability to
obtain accurate current information about the borrower and the Investment
Manager may have to rely on the original underwriting information with limited
ability to verify the information. These loans are currently performing as
agreed.
While the Company has not to date done so, it may also finance real estate
investors, who are not operators of the properties financed. Such loans would be
collateralized by a lien on the real estate acquired or other real estate owned
by the borrower or its principals. The personal guaranty of one or more of the
principals will typically be obtained. The loans will generally carry a fixed
rate and have maturities of five to 20 years from the date of issuance. In some
instances, there may be earlier maturity dates or dates on which the interest
rate may be modified. Most loans will provide for scheduled monthly amortization
and have a balloon payment requirement. In addition, the Company may also
purchase real estate to hold in the Company's investment portfolio.
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<PAGE> 35
BORROWER ADVANCES
The Company finances some projects during the construction phase. At March
31, 1996, the Company was in the process of monitoring approximately $21.6
million in total commitments for construction projects, of which $9.9 million
had been funded. As part of the monitoring process to verify that the borrower's
equity investment is utilized for its intended purpose, the Company holds a
portion of the borrower's equity investment. These funds are itemized by
category (e.g., interest, inventory, construction contingencies, etc.) and are
released by the Company only upon presentation of appropriate documentation
relating to the construction project. To the extent possible, these funds are
utilized before any related loan proceeds are disbursed. At March 31, 1996, of
the borrower advances, $1.1 million was to be disbursed on behalf of borrowers
and is included as a liability on the Company's financial statements.
LOAN COMMITMENTS
At March 31, 1996, the Company had approximately $19.2 million of loan
commitments outstanding to 15 small business concerns in the lodging industry.
The weighted average interest rate on these loan commitments at March 31, 1996
was 10.57%. In addition, the Company had approximately $8.5 million of loan
commitments outstanding on 13 partially funded construction loans and $8.0
million of loan commitments outstanding on 11 Program loans. An additional $15.2
million in commitments made by the Investment Manager had been designated for
the Company at March 31, 1996, with a weighted average interest rate of 10.64%,
subject to availability of funds. These commitments are made in the ordinary
course of the Company's business and, in management's opinion, are generally on
the same terms as those to existing borrowers. Since some commitments expire
without the proposed loan closing, the total committed amounts do not
necessarily represent future cash commitments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
TAX STATUS
The Company has elected to be taxed as a REIT under Section 856(c) of the
Code. As a REIT, the Company generally is not subject to Federal income tax to
the extent it distributes at least 95% of its REIT taxable income to
shareholders. The Company may, however, be subject to certain state and local
taxes on its income and property. REITs are subject to a number of
organizational and operational requirements under the Code. See "Federal Income
Tax Considerations."
INVESTMENT MANAGER
The investments of the Company are managed by PMC Advisers. Pursuant to the
Investment Management Agreement between the Company and PMC Advisers, the
Company is obligated to pay to the Investment Manager, quarterly in arrears, a
base fee (the "Base Fee") consisting of a quarterly servicing fee of 0.125% of
the Average Quarterly Value of All Assets, representing on an annual basis
approximately 0.50% of the Average Annual Value of All Assets, and a quarterly
advisory fee of 0.25% of the Average Quarterly Value of All Invested Assets,
representing on an annual basis approximately 1% of the Average Annual Value of
All Invested Assets. In addition, for each calendar year during which the
Company's annual Return on Average Equity Capital after deduction of the Base
Fee (the "Actual Return") exceeds 6.69%, the Company will pay to the Investment
Manager, as incentive compensation, an additional advisory fee (the "Annual
Fee") equal to the product determined by multiplying the Average Annual Value of
All Invested Assets by a percentage equal to the difference between the Actual
Return and 6.69%, up to a maximum of 1% per annum. The Annual Fee will be earned
only to the extent that the annual Return on Average Common Equity Capital after
the deduction of the Base Fee and Annual Fee is at least equal to 6.69%. All
such advisory fees will be reduced by 50% with respect to the value of Invested
Assets that exceed Common Equity Capital as a result of leverage or the issuance
of Preferred Shares. See "Investment Manager."
Pursuant to the Investment Management Agreement, the Company incurred an
aggregate of $429,000, $1,189,000 and $356,000 in management fees for the years
ended December 31, 1994 and 1995 and the three months ended March 31, 1996,
respectively. See "Investment Manager -- Investment Management Agree-
33
<PAGE> 36
ment." Of the total management fees paid or payable to the Investment Manager as
of December 31, 1994 and 1995 and the three months ended March 31, 1996,
$71,500, $244,000 and $80,000, respectively, has been netted against commitment
fees as a direct cost of originating fees. Pursuant to the Investment Management
Agreement, no advisory fees were due to the Investment Manager from inception
through June 30, 1994. See "Investment Manager."
COMPETITION
The Company believes its primary competitors are banks, financial
institutions, insurance companies and other lending companies. Additionally,
there are lending programs which have been established by national franchisors
in the lodging industry. Many of these entities may have greater financial and
larger managerial resources than the Company. The Company believes that it
competes with such entities based on: (i) the interest rates, maturities and
payment schedules offered to borrowers, (ii) the reputation, experience and
marketing ability of officers of the Investment Manager, (iii) the timely credit
analysis and decision-making processes followed by the Investment Manager and
(iv) the renewal options available to borrowers.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
Investment Policies. The Company's principal investment objective is to
obtain current income from interest payments and other related fee income on its
Invested Assets for distribution to shareholders. The Company invests in
accordance with underwriting criteria established by the trust managers with the
intention of creating a portfolio of investments while preserving the capital
base of the Company and generating income for distribution to the Company's
shareholders. The Company's investments are primarily intended to be held to
maturity. The Company's investments and plan of operation are restricted by tax
provisions applicable to REITs. These tax provisions include restrictions on the
ability to sell investments for a gain, therefore, the Company has a low
turnover rate with respect to its investments.
The Company will not purchase or otherwise acquire equity securities (other
than the acquisition of securities upon foreclosure of a security interest, if
any), and under no circumstances will the Company invest in the securities of
other issuers for the purpose of exercising control. The Company will not
underwrite securities of other issuers except to the extent that it might be
deemed an "underwriter" for securities law purposes with respect to investments
that have not been and may not be offered publicly without registration under
federal or state securities laws. The Invested Assets that the Company has
originated or acquired will generally be held to maturity; however, the Company
may, from time to time, if it determines it to be advantageous and consistent
with its status as a REIT, sell specified loans to purchasers. The Company will
not offer its own securities in exchange for property, except to the extent that
the Company may issue Common Shares, priced at not less than their market value,
in lieu of an equivalent amount of cash to purchase Invested Assets or
derivative securities where such transaction would, in the judgment of the trust
managers, be advantageous to the Company and consistent with the Company's
status as a REIT. The Company will not purchase or otherwise reacquire its
Common Shares except to the extent that it may elect to redeem Common Shares to
maintain its REIT status. The Company may, however, redeem senior securities
issued by it to the extent permitted by the terms of such senior securities. The
Company may elect to create and sell interests in real estate mortgage
investment conduits or collateralized mortgage obligations if deemed appropriate
by the Company. The Company will not acquire residual interests in real estate
mortgage investment conduits, as defined in the Code, or interests in pools of
loans offered by certain governmental agencies or other similar entities, except
that the Company may invest temporarily in mortgage pass-through certificates or
interests in mortgage pools guaranteed by the Government National Mortgage
Association, the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation or similar agencies and instrumentalities. The trust
managers, including a majority of the Independent Trust Managers, may adopt or
change any investment policy of the Company consistent with its status as a REIT
without a vote of the shareholders of the Company.
Financing Policies. The Company intends to borrow money from, and issue
debt securities to, banks, insurance companies and other lenders, and may issue
Preferred Shares in order to obtain additional funds to originate Primary
Investments and Other Investments. No assurance can be given that credit
facilities will be
34
<PAGE> 37
available to the Company on favorable terms or at all. Any such borrowing or
issuance of Preferred Shares will require the specific approval of the trust
managers, including a majority of the Independent Trust Managers. Except to the
extent of nonrecourse purchase money financing from the agencies or other
sellers of loans, the Company will not, without the approval of a majority of
its shareholders, incur a borrowing or issue Preferred Shares if as a result the
Company's total liability for money borrowed would exceed 200% of its
shareholders' equity or the total amount of borrowings and obligations in
respect of outstanding Preferred Shares would exceed 300% of common
shareholders' equity, determined as of the time of each borrowing or issuance.
Affiliate Transaction Policy. Section 4.12 of the Bylaws of the Company
provides that, except as otherwise provided by the Declaration of Trust or the
Bylaws, and in the absence of fraud, a contract, act or other transaction,
between the Company and any other person, or in which the Company is interested,
shall be valid and no trust manager or officer of the Company shall have any
liability as a result of entering into any such contract, act or transaction,
even though (i) one or more of the trust managers, directly or indirectly, is
interested in, connected with or is a trustee, partner, director, shareholder,
member, employee, officer or agent of such other person, or (ii) one or more of
the trust managers, individually or jointly with others, is a party to, or
directly or indirectly is interested in, or connected with, such contract, act
or transaction, provided that (a) such interest or connection is disclosed in
reasonable detail or known to the trust managers and thereafter the trust
managers authorize or ratify such contract, act or other transaction by
affirmative vote of a majority of the Independent Trust Managers, or (b) such
interest or connection is disclosed in reasonable detail or known to the
shareholders, and thereafter such contract, act or transaction is approved by
shareholders holding a majority of the shares then outstanding and entitled to
vote thereon.
Section 4.11 of the Bylaws provide that any trust manager or officer of the
Company may acquire, own, hold and dispose of shares of the Company for his
individual account, and may exercise all rights of a shareholder to the same
extent and in the same manner if he were not a trust manager or officer of the
Company. Any trust manager or officer of the Company may, in a capacity other
than that of trust manager or officer of the Company, have business interests
and engage in business activities similar to or in addition to those relating to
the Company which may include the acquisition, syndication, holding, management,
development, operation or disposition, for his own account or for the account of
others, of interest in mortgages, interests in real property, or interests in
persons engaged in the real estate business. Each trust manager and officer of
the Company shall be free of any obligation to present to the Company any
investment opportunity which comes to him in any capacity other than solely as
trust manager or agent of the Company, even if such opportunity is of a
character which, if presented to the Company, could be exploited by the Company.
Subject to Section 4.12 of the Bylaws discussed above, any trust manager or
officer of the Company may be a trustee, officer, director, shareholder,
partner, member, advisor or employee of, or otherwise have a direct or indirect
interest, in any person who may be engaged to render advice or services to the
Company, and may receive compensation from such person as well as compensation
as trust manager or officer or otherwise hereunder.
The Company has not adopted any polices with respect to its shareholders,
affiliates (other than trust managers and officers) or any other person (i)
having any direct or indirect pecuniary interest (a) in any investment to be
acquired or disposed of by the Company or (b) in any transactions to which the
Company is a party or has an interest, or (ii) engaging for their own account in
business activities of the type conducted by the Company.
Reports to Shareholders. The Company provides annual reports to the holders
of Common Shares containing audited financial statements with a report thereon
from the Company's independent public accountants and, upon request, quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year. See "Available Information."
SBA REGULATIONS
The Company primarily originates loans to small businesses that, among
other things, exceed the net worth, asset, income, number of employees or other
limitations applicable to the SBA programs utilized by PMC Capital. See
"-- Underwriting Criteria and Loan Originations." While the eligibility
requirements of
35
<PAGE> 38
the Section 7(a) of the SBA program vary by the industry of the borrower and
other factors, the general eligibility requirements of loans originated under
Section 7(a) of the SBA program are that: (i) gross sales of the borrower cannot
exceed a range of between $5.0 million and $21.5 million depending upon the
industry of the borrower (other than with respect to certain industries where
eligibility is determined based on a number of employees), (ii) when the total
amount of the proposed financing (a) is $250,000 or less, each 20% owner of the
applicant must contribute to the business personal liquid assets per the SBA
rules and regulations ("Personal Liquid Assets") in excess of two times the
total financing or $100,000, whichever is greater, (b) is between $250,0000 and
$500,000, each 20% owner of the applicant must contribute Personal Liquid Assets
to the business in excess of one and one-half times the total financing or
$500,000, whichever is greater and (c) exceeds $500,000, each 20% owner of the
applicant must contribute to the business Personal Liquid Assets in excess of
one times the total financing or $750,000, whichever is greater, and (iii) the
maximum aggregate SBA loan guarantees to a borrower cannot exceed $750,000.
Loans originated pursuant to the SBIC program are not guaranteed by SBA and
generally require that: (i) the net worth of the borrower and certain affiliates
of the borrower cannot exceed $18 million; and (ii) net income after Federal
income taxes of the borrower averages less than $6 million for the most recent
two years.
EMPLOYEES
The Company has no salaried employees. All personnel required for the
Company's operations are provided by the Investment Manager.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation incidental
to its business. The Company does not believe that its current proceedings will
have a material adverse effect on the results of operations or financial
condition of the Company.
36
<PAGE> 39
MANAGEMENT
TRUST MANAGERS AND OFFICERS
The Company is managed by its trust managers, who are elected annually by
the shareholders. The trust managers are responsible for appointing the
executive officers of the Company, for selecting, monitoring and supervising the
Investment Manager, for approving borrowings by the Company and for periodically
valuing the Company's portfolio. The trust managers are also responsible for the
adoption from time to time of such investment policies and limitations as they
may deem appropriate in light of the Company's investment objective.
The following table sets forth the names and positions of the trust
managers and officers of the Company.
<TABLE>
<CAPTION>
POSITIONS AND
NAME OFFICES WITH THE COMPANY(1)
----------------------------------------- -----------------------------------------
<S> <C>
Dr. Andrew S. Rosemore(2)................ Chairman of the Board, Executive Vice
President, Chief Operating Officer,
Treasurer and Trust Manager
Lance B. Rosemore(2)..................... President, Chief Executive Officer,
Secretary and Trust Manager
Jan F. Salit............................. Executive Vice President, Chief
Investment Officer and Assistant
Secretary
Barry N. Berlin.......................... Chief Financial Officer
Mary J. Brownmiller...................... Senior Vice President
Nathan G. Cohen(3)....................... Trust Manager
Dr. Martha R. Greenberg(2)............... Trust Manager
Roy H. Greenberg(3)...................... Trust Manager
Irving Munn(3)........................... Trust Manager
Dr. Ira Silver(3)........................ Trust Manager
</TABLE>
- ---------------
(1) All of the officers of the Company have held positions with the Company
since the formation of the Company on June 4, 1993.
(2) Lance B. Rosemore and Dr. Andrew S. Rosemore are brothers and Dr. Martha R.
Greenberg is their sister.
(3) Messrs. Cohen, Greenberg and Munn and Dr. Silver serve as Independent Trust
Managers.
Information concerning the trust managers and executive officers of the
Company is as follows:
DR. ANDREW S. ROSEMORE -- Dr. Rosemore, 49, has been Executive Vice
President, Chief Operating Officer and Treasurer of the Company since June 1993
and has been Chairman of the Board of Trust Managers since January 1994. He has
also been the Chief Operating Officer of PMC Capital since May 1992 and
Executive Vice President of PMC Capital since 1990. From 1988 to May 1990, Dr.
Rosemore was Vice President of PMC Capital. Dr. Rosemore has been a director of
PMC Capital since 1988.
MR. LANCE B. ROSEMORE -- Mr. Rosemore, 47, has been President, Chief
Executive Officer and Secretary of the Company since June 1993. He has also been
Chief Executive Officer of PMC Capital since May 1992 and President of PMC
Capital since 1990. Mr. Rosemore has been employed by PMC Capital since 1979.
From 1990 to May 1992, Mr. Rosemore was Chief Operating Officer of PMC Capital.
Mr. Rosemore has been Secretary of PMC Capital since 1983. Mr. Rosemore has been
a director of PMC Capital since 1983.
MR. JAN F. SALIT -- Mr. Salit, 46, has been Executive Vice President of the
Company since June 1993, and Chief Investment Officer and Assistant Secretary
since January 1994. He has also been Executive Vice
37
<PAGE> 40
President of PMC Capital since May 1993 and Chief Investment Officer and
Assistant Secretary of PMC Capital since March 1994. From 1979 to 1992, Mr.
Salit was employed by Glenfed Financial Corporation and its predecessor company
Armco Financial Corporation, a commercial finance company, holding various
positions including Executive Vice President and Chief Financial Officer.
MR. BARRY N. BERLIN --Mr. Berlin, 36, has been Chief Financial Officer of
the Company since June 1993. Mr. Berlin has also been Chief Financial Officer of
PMC Capital since November 1992. From August 1986 to November 1992, he was an
audit manager with Imber and Company, Certified Public Accountants. Mr. Berlin
is a Certified Public Accountant.
MS. MARY J. BROWNMILLER -- Ms. Brownmiller, 41, has been Senior Vice
President of the Company since June 1993. Ms. Brownmiller has also been Senior
Vice President of PMC Capital since 1992 and Vice President of PMC Capital since
November 1989. From 1987 to 1989, she was Vice President for Independence
Mortgage, Inc., an SBA lender. From 1976 to 1987, Ms. Brownmiller was employed
by the SBA, holding various positions including senior loan officer. While at
the SBA, Ms. Brownmiller was involved in making credit decisions, monitoring
adherence to SBA underwriting criteria and assisting in the final determination
as to the approval of loans of all sizes. Ms. Brownmiller is a Certified Public
Accountant.
MR. NATHAN G. COHEN --Mr. Cohen, 50, has been an Independent Trust Manager
of the Company since May, 1994. Mr. Cohen has been Controller and Chief
Financial Officer of ATCO Rubber Products, Inc., a manufacturer of products for
HVAC systems, since November 1986.
DR. MARTHA R. GREENBERG -- Dr. Greenberg, 45, has been a trust manager of
the Company since May 1996. Dr. Greenberg has practiced optometry for 17 years
in Russellville, Alabama. Dr. Greenberg has been a director of PMC Capital since
1984. Dr. Greenberg is not related to Mr. Roy H. Greenberg, but is the sister of
Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore.
MR. ROY H. GREENBERG -- Mr. Greenberg, 37, has been an Independent Trust
Manager of the Company since September 1993. Mr. Greenberg has been the
President of Whitehall Real Estate, Inc., a real estate management firm, since
December 1989. Prior thereto, he was Vice President of GHR Realty Holding Group,
Inc., a real estate management company, from June 1985 to December 1989. Mr.
Greenberg is not related to Dr. Martha R. Greenberg.
MR. IRVING MUNN -- Mr. Munn, 46, has been an Independent Trust Manager of
the Company since September 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. IRA SILVER -- Dr. Silver, 50, has been an Independent Trust Manager of
the Company since May 1996. Dr. Silver has been employed by J.C. Penney Co.,
Inc. since 1978, is currently their Chief Economist and since 1984 has been a
Manager of Planning, Forecasting and Technical Support in the Planning and
Research Department. He holds a Ph.D in Economics from the City University of
New York. Dr. Silver had been a director of PMC Capital from 1992 through 1994.
All officers and trust managers hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal. The Company has elected four Independent Trust Managers who are not
affiliated with the Investment Manager or PMC Capital. Messrs. Greenberg and
Munn comprise the Audit Committee of the Board of Trust Managers and all of the
Independent Trust Managers serve as the administrators of the Share Option Plans
(as defined below).
A majority of the Independent Trust Managers must approve all transactions
between PMC Advisers or PMC Capital and the Company, including the approval and
renewal of the Investment Management Agreement. Although Dr. Silver served as a
director of PMC Capital from 1992 to 1994, the Company does not believe that
such relationship with PMC Capital affects his ability to serve as an
Independent Trust Manager. To the extent that any trust manager is interested in
a proposed transaction involving the Company, such trust manager would be
considered an interested party with respect to such transaction and such
38
<PAGE> 41
transaction must be approved by the disinterested trust managers as indicated
under "Transactions with Affiliates" below.
The Independent Trust Managers will each (i) be reimbursed by the Company
for their expenses in attending meetings of trust managers or any committee
thereof, (ii) receive a fee of $500 for attendance in person at each meeting,
and (iii) be granted options under the Trust Managers Plan (as defined below).
The Company's officers are employees of the Investment Manager and receive no
compensation from the Company for their services as officers or trust managers,
although they may receive options under the Employee Plan (as defined below).
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 9.20 of the Texas REIT Act, subject to procedures and limitations
stated therein, allows the Company to indemnify any person who was, is or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a trust manager or officer against judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable expenses
actually incurred by the person in connection with the proceeding. The Company
is required by Section 9.20 of the Texas REIT Act to indemnify a trust manager
or officer against reasonable expenses incurred by him in connection with a
proceeding in which he is a named defendant or respondent because he is or was a
trust manager or officer if he has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. Under the Texas REIT Act, trust
managers and officers are not entitled to indemnification if (i) the trust
manager or officer is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received and (ii)
the trust manager or officer was found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
The statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any provision of the Declaration of Trust, bylaws, agreements or
otherwise. In addition, the Company has, pursuant to Section 15.10 of the Texas
REIT Act, provided in its Declaration of Trust that, to the fullest extent
permitted by applicable law, a trust manager of the Company shall not be liable
for any act, omission, loss, damage or expense arising from the performance of
his duty under the Texas REIT Act, except for his own willful misfeasance,
malfeasance or negligence.
The Company's Declaration of Trust and Bylaws provide for indemnification
by the Company of its trust managers and officers to the fullest extent
permitted by the Texas REIT Act. In addition, the Company's Bylaws provide that
the Company may pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager or
officer made a party to a proceeding by reason of his status as a trust manager
or officer provided that (i) the trust managers have consented to the
advancement of expenses (which consent shall not unreasonably be withheld) and
(ii) the Company shall have received (a) a written affirmation by the trust
manager or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company under the Texas REIT Act
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met or it is ultimately determined that indemnification of
the trust manager or officer against expenses incurred by him in connection with
that proceeding is prohibited by Section 9.20 of the Texas REIT Act.
In addition, the Investment Management Agreement provides that the
Investment Manager shall be deemed an agent of the Company and the Investment
Manager and its directors, officers and employees shall be indemnified by the
Company to the same extent as the trust managers and officers of the Company.
SHARE OPTION PLANS
General. The Company has adopted the 1993 Employee Share Option Plan (the
"Employee Plan") and the 1993 Trust Manager Share Option Plan (the "Trust
Manager Plan," and together with the Employee Plan, the "Share Option Plans").
The purpose of the Share Option Plans is to provide a means of performance-based
compensation in order to attract and retain qualified personnel to serve as
trust managers and officers of the Company and to provide an incentive to others
such as the directors, officers or key
39
<PAGE> 42
employees of the Investment Manager whose job performance affects the Company.
The Share Option Plans each provide for administration by a committee of the
Independent Trust Managers established for such purpose (the "Plan
Administrators"). The exercise price for any option granted under the Share
Option Plans may not be less than 100% of the fair market value of the Common
Shares at the time the option is granted.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Share Option Plans authorize the grant of options to acquire
in the aggregate Common Shares in an amount equal to 6% of the issued and
outstanding Common Shares at any time. If an option granted under the Share
Option Plans expires or terminates, the Common Shares subject to any unexercised
portion of that option will again become available for the issuance of further
options under the Share Option Plans. Unless previously terminated by the trust
managers, the Share Option Plans will terminate on the tenth anniversary of the
effective date of the Share Option Plans and no options may be granted under the
Share Option Plans thereafter.
No options may be granted under the Share Option Plans to any person who,
assuming exercise of all options held by such person, would own or be deemed to
own more than 9.8% of the outstanding Common Shares. There is no limit on the
number of nonqualified options that may be granted to any one individual,
provided that the grant of the options may not cause the Company to fail to
qualify as a REIT. An optionee may, with the consent of the Plan Administrators,
elect to pay for the Common Shares to be received upon exercise of his options
in cash, Common Shares or any combination thereof.
The trust managers may, without affecting any outstanding options, from
time to time revise or amend the Share Option Plans, and may suspend or
discontinue the Share Option Plans at any time. However, no such revision or
amendment may increase the number of shares subject to the Share Option Plans
(with the exception of adjustments resulting from changes in capitalization),
change the class of participants eligible to receive options granted under the
Share Option Plans or modify the period within which or the terms upon which the
options may be exercised pursuant to the Share Option Plans without shareholder
approval.
The Employee Plan. The Employee Plan provides for the grant of both
qualified incentive share options ("ISOs") which meet the requirements of
Section 422 of the Code and nonqualified share options. ISOs may be granted to
the officers and key employees of the Company. Nonqualified share options may be
granted to the trust managers who are officers of the Company, other officers
and key employees (if any) of the Company and to the management, directors,
officers and key employees of the Investment Manager. Options granted under the
Employee Plan will become exercisable in accordance with the terms of the grant
made by the Plan Administrators. The Plan Administrators have discretionary
authority to select participants from among eligible persons and to determine at
the time an option is granted whether it is intended to be an ISO or a
nonqualified option, and when and in what increments Common Shares covered by
the option may be purchased. Under current law, ISOs may not be granted to any
trust manager of the Company who is not also a full time employee or to
directors, officers and other employees of entities unrelated to the Company.
With respect to ISOs granted under the Employee Plan, the exercise price
must be at least equal to the fair market value of the Common Shares on the date
of grant and the term cannot exceed five years. With respect to any individual,
the aggregate fair market value (determined at the time the option is granted)
of Common Shares with respect to which ISOs may be granted under the Employee
Plan, or any other plan of the Company, which options are exercisable for the
first time during any calendar year, may not exceed $100,000.
Each option must terminate no more than five years from the date it is
granted. Options may be granted on terms providing that they will be exercisable
either in whole or in part at any time or times during their respective terms,
or only in specified percentages at stated time periods or intervals during the
term of the option.
The Trust Manager Plan. Only Independent Trust Managers are eligible to
participate in the Trust Managers Plan which provides for the grant of
nonqualified stock options. The Trust Manager Plan is a nondiscretionary plan
pursuant to which options to purchase 2,000 Common Shares are granted to each
Independent Trust Manager on the date such trust manager takes office and
additional options to purchase 1,000 Common Shares are granted each year
thereafter on the anniversary date of the date that the trust
40
<PAGE> 43
manager takes office so long as such trust manager is re-elected to serve as a
trust manager. Such options are exercisable at the fair market value of the
Common Shares on the date of grant. The options granted under the Trust Manager
Plan become exercisable one year after date of grant and expire if not exercised
on the earlier of (i) 30 days after the option holder no longer holds office as
an Independent Trust Manager for any reason or (ii) within five years after date
of grant.
COMPENSATION OF TRUST MANAGERS
During 1995, the Independent Trust Managers received a $500 fee for each
meeting the Board of Trust Managers attended. The Independent Trust Managers
will be reimbursed by the Company for their expenses related to attending board
or committee meetings. For the year ended December 31, 1995, each of Messrs.
Cohen and Munn received $2,500 and Mr. Greenberg received $2,000 for services
rendered as Independent Trust Managers.
In accordance with the terms of the Trust Manager Plan, each of the
Independent Trust Managers is, on the anniversary date of his election to the
Board of Trust Managers, automatically granted options (which are exercisable
one year after the date of grant) to purchase 1,000 Common Shares. Accordingly,
each of Messrs. Greenberg and Munn was granted an option to acquire 1,000 Common
Shares on December 15, 1995, at an exercise price of $15.75 per share, and Mr.
Cohen was granted an option to acquire 1,000 Common Shares on May 10, 1995, at
an exercise price of $14.125 per share, in each case the exercise price was
equal to the fair market value of the Common Shares on the date of grant.
OPTION GRANTS
The following table sets forth information regarding stock options granted
to each of the executive officers in the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF SHARE
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---------------------------------------------------------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Lance B. Rosemore............................... 6,000 27% $15.75 12/15/00 $26,108 $57,693
Andrew S. Rosemore.............................. 6,000 27% 15.75 12/15/00 26,108 57,693
Jan F. Salit.................................... 3,840 18% 15.75 12/15/00 16,709 36,924
Barry N. Berlin................................. 3,840 18% 15.75 12/15/00 16,709 36,924
Mary J. Brownmiller............................. 1,200 5% 15.75 12/15/00 5,222 11,539
</TABLE>
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth, for each of the executive officers,
information regarding exercise of stock options during the fiscal year ended
December 31, 1995 and the value of unexercised stock options as of December 31,
1995. The closing price for the Common Shares, as reported by the American Stock
Exchange, on December 29, 1995 (the last trading day of the fiscal year) was
$16.25.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED ON VALUE (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
NAME EXERCISE(#) REALIZED($) (#) ($)
- ---------------------------------------- ----------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Lance B. Rosemore............ 7,675 35,017 13,675(u) 36,578(u)
Andrew S. Rosemore........... 7,675 35,017 13,675(u) 36,578(u)
Jan F. Salit................. 2,026 9,243 1,814(e)/7,680(u) 7,936(e)/18,720(u)
Barry N. Berlin.............. 1,498 6,834 2,342(e)/7,680(u) 10,246(e)/18,720(u)
Mary J. Brownmiller.......... 307 1,401 893(e)/2,400(u) 3,907(e)/5,850(u)
</TABLE>
- ---------------
(e) Options are exercisable within 60 days of the date hereof.
(u) Options are not exercisable within 60 days of the date hereof.
41
<PAGE> 44
INVESTMENT MANAGER
As a wholly-owned subsidiary and investment manager of PMC Capital, PMC
Advisers also generates lending opportunities which fulfill the investment
criteria of the Company. Through this advisory relationship, the Company
benefits from PMC Capital's over 17 years of operating history and over $350
million in assets under management. The principal address of the Investment
Manager is 17290 Preston Road, Third Floor, Dallas, Texas 75252 and its
telephone number is (214) 380-0044.
All of the directors and officers of PMC Advisers are also directors and
officers of PMC Capital. In addition, the trust managers, other than the
Independent Trust Managers, and the officers of the Company are directors and
officers of the Investment Manager. See "Risk Factors" and "Management." The
directors and officers of the Investment Manager are as follows:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME WITH THE INVESTMENT MANAGER
-------------------------------------- ---------------------------------------------
<S> <C>
Dr. Fredric M. Rosemore............... Chairman of the Board and Treasurer
Lance B. Rosemore(1)(2)............... President, Chief Executive Officer and
Secretary
Dr. Andrew S. Rosemore(1)(2).......... Executive Vice President and Chief Operating
Officer
Jan F. Salit(2)....................... Executive Vice President, Chief Investment
Officer and Assistant Secretary
Barry N. Berlin(2).................... Chief Financial Officer
Mary J. Brownmiller(2)................ Senior Vice President
Dr. Irvin M. Borish................... Director
Robert Diamond........................ Director
Dr. Martha R. Greenberg(1)(2)......... Director
Thomas Hamill......................... Director
Barry A. Imber........................ Director
Lee Ruwitch........................... Director
</TABLE>
- ---------------
(1) Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr. Martha
Greenberg is the daughter, of Dr. Fredric M. Rosemore.
(2) Also serve as trust managers or officers of the Company. See "Management"
for additional information with respect to such persons.
Information relating to the directors of the Investment Manager who do not
have a position with the Company is as follows:
DR. FREDRIC M. ROSEMORE -- Dr. Rosemore, 72, has been the Chairman of the
Board and Treasurer of PMC Capital since 1983. From 1990 to 1992, Dr. Rosemore
was a Vice President of PMC Capital and from 1979 to 1990, Dr. Rosemore was the
President of PMC Capital. For many years, he was engaged in diverse businesses,
including the construction of apartment complexes, factory buildings and
numerous commercial retail establishments. From 1948 to 1980, Dr. Rosemore
practiced optometry. He has been a director of PMC Capital since 1983.
DR. IRVIN M. BORISH -- Dr. Borish, 83, served as Benedict (Distinguished)
Professor of Optometry at the University of Houston, after retiring from Indiana
University, where he holds the status of Professor Emeritus. He practiced
optometry for over 30 years. He is the author of a major text in his field and
holds five patents in contact lenses. Dr. Borish has been a director of PMC
Capital since 1989.
MR. ROBERT DIAMOND -- Mr. Diamond, 64, has been an attorney for 39 years.
He is currently of counsel to the law firm of Diamond & Diamond, P.A., Millburn,
New Jersey. He served as a director of PMC Capital from 1982 to 1992 and
rejoined the Board of Directors in January 1994. He served as a member of the
Board
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<PAGE> 45
of Directors of Allstate Financial Corporation from 1991 to 1993. He has managed
personal investments since 1991.
MR. THOMAS HAMILL -- Mr. Hamill, 42, has been the President, Chief
Executive Officer and a director of Caliban Holdings and its subsidiary,
Belvedere Holdings Ltd. ("Belvedere"), since 1993. From 1989 to 1993, Mr. Hamill
was the President, Chief Operating Officer and a director of Belvedere. From
September 1986 to December 1989, Mr. Hamill was Vice President of Belvedere
America Re and Vice President and Secretary of Belvedere Corporation. Mr. Hamill
is the Chairman of the Board and a non-executive director of Midlands Management
Corporation. Mr. Hamill has been a director of PMC Capital since 1992.
MR. BARRY A. IMBER -- Mr. Imber, 49, has been a principal of Imber and
Company, Certified Public Accountants, or its predecessor, since 1982. Imber and
Company was the independent certified public accountant for PMC Capital and its
subsidiaries for the years ended December 31, 1988 through December 31, 1991.
Mr. Imber was a Trust Manager of the Company from September 1993 to March 1995
and a director of PMC Capital since March 1995.
MR. LEE RUWITCH -- Mr. Ruwitch, 82, has managed personal investments since
1986. Since 1987, he has been the President of LFR Corporation and since 1992,
he has been a partner in TCA Joint Venture. Each of these entities is
principally engaged in the business of financial investments. From 1964 to 1986,
Mr. Ruwitch was the publisher and owner of Review Business Publications, Inc. in
Miami, Florida. From 1949 to 1964, he served as president of the company which
operates public television station WTVJ in Miami, Florida. Mr. Ruwitch has been
active in the communications industry for over 30 years. Mr. Ruwitch has been a
director of PMC Capital since 1984.
INVESTMENT MANAGEMENT AGREEMENT
The Company has entered into an Investment Management Agreement with the
Investment Manager. The Investment Management Agreement expires on December 31
of each year and is currently scheduled to expire on December 31, 1996; however,
it is renewable by the Company, subject to (i) a determination by a majority of
the Independent Trust Managers that the Investment Manager's performance has
been satisfactory, (ii) a determination by a majority of the Independent Trust
Managers that the terms of the Investment Management Agreement are appropriate
in light of the Company's performance and then existing economic conditions, and
(iii) the termination rights of the parties. The Investment Management Agreement
may be terminated for any reason upon 60 days' written notice by (i) a majority
vote of the Independent Trust Managers of the Company, (ii) a vote of the
holders of more than two-thirds of the outstanding Common Shares, or (iii) a
majority vote of the independent directors of the Investment Manager. Other than
the notice provision, there is no contractual impediment to the termination of
the Investment Management Agreement by PMC Advisers. In the event the Investment
Management Agreement were terminated, a significant portion of the then
outstanding commitments would no longer be required to be funded by the Company;
however, such commitments will remain the obligations of PMC Advisers. See "Risk
Factors -- Credit Risks of Loans." The Investment Management Agreement is not
assignable by the Investment Manager without the written consent of the Company.
All transactions with the Investment Manager must be approved by a majority of
the Independent Trust Managers as well as a majority of the independent
directors of the Investment Manager, although no shareholder approval of either
party is required. Additionally, the Investment Management Agreement may be
amended, supplemented, discharged or modified, provided that such amendment,
supplement, discharge or modification, in the case of the Company, is approved
by a majority vote of the Independent Trust Managers or a vote of the holders of
more than two-thirds of the outstanding Common Shares and, in the case of PMC
Advisers, is approved by a majority vote of its disinterested directors. While
the Company has no current relationship with any investment manager other than
PMC Advisers, management of the Company believes that in the event that the
Investment Management Agreement is not renewed, the Company can obtain the
services of third party investment 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."
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<PAGE> 46
Pursuant to the Investment Management Agreement, the Investment Manager,
under the supervision of the trust managers, identifies, evaluates, structures
and closes the investments made by the Company, arranges debt financing for the
Company, subject to the approval of the Independent Trust Managers, and is
responsible for monitoring the investments made by the Company, including loan
portfolio management and servicing.
The Company pays all operating expenses except those specifically required
to be borne by the Investment Manager pursuant to the Investment Management
Agreement. The operating expenses required to be borne by the Investment Manager
include any compensation to the Company's officers (other than stock options)
and the cost of office space, equipment and other personnel required for the
Company's day-to-day operations. The expenses paid by the Company include
transaction costs incident to the acquisition and disposition of investments,
regular legal and auditing fees and expenses, the fees and expenses of the
Company's Independent Trust Managers, the costs of printing and mailing proxies
and reports to shareholders and the fees and expenses of the Company's custodian
and transfer agent, if any. The Company, rather than the Investment Manager, is
also required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses. All fees that may be paid to the
Investment Manager by any person other than the Company in connection with any
investment transaction of the Company will be paid or credited to the Company.
Pursuant to the Investment Management Agreement, the Company pays to the
Investment Manager, quarterly in arrears, a Base Fee consisting of a quarterly
servicing fee of 0.125% of the Average Quarterly Value of All Assets,
representing on an annual basis approximately 0.5% of the Average Annual Value
of All Assets, and a quarterly advisory fee of .25% of the Average Quarterly
Value of all Invested Assets, representing on an annual basis approximately 1%
of the Average Annual Value of All Invested Assets. In addition, for each
calendar year during which the Actual Return exceeds 6.69%, the Company will pay
to the Investment Manager, as incentive compensation, the Annual Fee equal to
the product determined by multiplying the Average Annual Value of All Invested
Assets by a percentage equal to the difference between the Actual Return and
6.69%, up to a maximum of one percent (1%) per annum. The Annual Fee will be
earned only to the extent that the annual Return on Average Common Equity
Capital after deduction of the Base Fee and Annual Fee is at least equal to the
minimum return of 6.69%. The Annual Fee will be calculated and paid (to the
extent payable) on an annual basis without regard to cumulative performance
results from preceding years. All advisory fees will be reduced by 50% with
respect to the value of Invested Assets that exceed Common Equity Capital as a
result of leverage. In addition, the Base Fee shall be reduced for each quarter
during the term of the Investment Management Agreement by an amount equal to the
amount of servicing or supervisory servicing fees, if any, required to be paid
for such quarter by the Company to any third party which is unaffiliated with
the Company or the Investment Manager for the servicing of certain assets. The
quarterly fee and any Annual Fee are paid as soon as practical after the values
have been determined. See "Risk Factors -- Conflicts of Interest; Transactions
with Affiliates" and "Glossary."
The following table sets forth the management fees paid by the Company to
the Investment Manager for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
31, ENDED
----------------------- MARCH 31,
1994 1995 1996
-------- ---------- ---------
<S> <C> <C> <C>
Base Fees
Advisory Fee......................................... $133,831 $ 455,363 $136,688
Servicing Fee........................................ 246,876 266,792 82,716
-------- ---------- --------
Total Base Fee............................... 380,707 722,155 219,404
Annual Fee............................................. 48,104 467,565 136,688
-------- ---------- --------
Total Management Fee......................... $428,811 $1,189,720 $356,092
======== ========== ========
</TABLE>
Pursuant to the Investment Management Agreement, for the six month period
following any public offering of Common Shares by the Company (other than
pursuant to the Plan and the Share Option Plans),
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<PAGE> 47
no additional servicing fees will be charged by the Investment Manager with
respect to the proceeds received from such public offering. In addition, the
proceeds of any such offering will not be included in Common Equity Capital for
determining the reduction of the advisory fees as a result of leverage for such
six month period. See "Glossary."
The trust managers believe that the compensation paid to the Investment
Manager under the Investment Management Agreement is fair in the context of (i)
the services to be provided by the Investment Manager, (ii) the fee arrangements
of investment advisers in other real estate investment trusts, (iii) the annual
renewal and termination provisions of the Investment Management Agreement, and
(iv) returns on similar investments. The ability of the Company to achieve an
Actual Return in excess of 6.69%, and of the Investment Manager to earn the
incentive compensation described in the preceding paragraph, is dependent upon
the level and volatility of interest rates, the Company's ability to react to
changes in interest rates and to utilize successfully the operating strategies
described herein, and other factors, many of which are not within the control of
the Company or the Investment Manager.
In accordance with the terms of the Investment Management Agreement, the
Investment Manager will be considered an agent of the Company for the purpose of
the indemnification provisions of the Company's Declaration of Trust and Bylaws
and will not be liable to the Company, its shareholders or creditors except for
violation of law or conduct which would preclude indemnification by the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Shares as of May 31, 1996, by (i) the only
shareholder known to the management of the Company to own beneficially more than
5% of the outstanding Common Shares, (ii) each trust manager and executive
officer, and (iii) the trust managers and executive officers as a group. Each
person named in the table has sole voting and investment power with respect to
all of the Common Shares shown as beneficially owned by such person:
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES PERCENT PRIOR
NAME AND ADDRESS BENEFICIALLY TO THE
OF BENEFICIAL OWNER OWNED OFFERING
------------------- ------------- -------------
<S> <C> <C>
Dr. Andrew S. Rosemore(1).................................. 68,385 1.9%
Dr. Martha R. Greenberg.................................... 26,795 *
Lance B. Rosemore(2)....................................... 20,543 *
Nathan G. Cohen(3)......................................... 4,700 *
Irving Munn................................................ 4,000 *
Barry N. Berlin(4)......................................... 3,893 *
Jan F. Salit............................................... 3,840 *
Roy H. Greenberg........................................... 3,500 *
Mary J. Brownmiller........................................ 1,200 *
Peter B. Cannell & Co., Inc................................ 359,825(5) 10.0%
919 Third Avenue
New York, New York 10022
All trust managers and executive officers as a group (10
persons)**............................................... 136,856 3.8%
</TABLE>
- ---------------
* Less than 1%.
** Dr. Ira Silver owns no Common Shares.
(1) Includes 28,950 shares held by his profit sharing plan, 23,400 shares held
by his IRA account, 3,570 held in a trust of which Dr. Rosemore is the
beneficiary and 400 shares held in the name of his minor children.
(2) Includes 1,231 shares held in the name of his minor children, and 4,600
shares held in a trust of which Mr. Rosemore is the beneficiary.
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<PAGE> 48
(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.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Declaration of Trust of the Company authorizes the Company to issue up
to 100,000,000 shares of beneficial interest of the Company ("Trust Shares"),
consisting of Common Shares, Preferred Shares and such other types of classes of
shares of beneficial interest as the trust managers may create and authorize
from time to time. Upon completion of the Offering, 5,639,346 Common Shares will
be issued and outstanding, excluding up to 300,000 Common Shares which may be
purchased by the Underwriters to cover over-allotments, if any. As of May 31,
1996, there were 3,579,346 Common Shares issued and outstanding.
The Company's Declaration of Trust also provides that, subject to the
provisions of any class or series of the capital shares of the Company then
outstanding, the shareholders of the Company shall be entitled to vote only on
the following matters: (i) election or removal of trust managers; (ii) amendment
of the Declaration of Trust; (iii) termination of the Company; (iv)
reorganization of the Company; (v) merger or consolidation of the Company or the
sale or disposition of all or substantially all of the Company's assets; and
(vi) termination of the Investment Management Agreement. Except with respect to
the foregoing matters, no action taken by the shareholders of the Company at any
meeting shall in any way bind the trust managers.
Both the Texas REIT Act and the Company's Declaration of Trust provide that
no shareholder of the Company will be individually or personally liable for any
obligation of the Company. The Company's Bylaws further provide that the Company
shall indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of his being or having been a
shareholder, and that the Company shall reimburse each shareholder for all legal
and other expenses reasonably incurred by him in connection with any such claim
or liability. In addition, it will be the Company's policy to include a clause
in its contracts which provides that shareholders assume no personal liability
for obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where shareholder liability is not so negated,
claims for taxes and certain statutory liability, the shareholder may, in some
jurisdictions, be individually or personally liable to the extent that such
claims are not satisfied by the Company. Inasmuch as the Company will carry
liability insurance which it considers adequate, any risk of personal liability
to shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
Common Shares of Beneficial Interest. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of trust managers. There is no cumulative
voting in the election of trust managers, which means that the holders of
two-thirds of the outstanding Common Shares can elect all of the trust managers
then standing for election. Holders of Common Shares are entitled to such
distributions as may be declared from time to time by the trust managers out of
funds legally available therefor. See "Dividends and Distributions Policy."
Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares, if any.
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<PAGE> 49
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 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
47
<PAGE> 50
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 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.
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<PAGE> 51
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.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion of the Federal tax rules governing a REIT and its
shareholders provides a summary of the material federal income tax consequences
affecting the Company and its shareholders and is based on the Code, judicial
decisions, Treasury Regulations, rulings and other administrative
interpretations, all of which are subject to change. Because many provisions of
the Code have been revised substantially by recent legislation, very few
judicial decisions, Treasury Regulations, rulings or other administrative
pronouncements have been issued interpreting many of the revisions to the Code.
Investors should be aware that Congress continues to consider new tax bills.
Accordingly, no assurance can be given that future legislation, administrative
regulations, rulings, or interpretations or court decisions will not alter
significantly the tax consequences described below or that such changes or
decisions will not be retroactive. The Company has not requested, nor does it
presently intend to request, a ruling from the Internal Revenue Service (the
"Service") with respect to any of the matters discussed below. Because the
provisions governing REITs are complex, no attempt is made in the following
discussion to discuss in detail all of the possible tax considerations
applicable to the Company or its shareholders, including state tax laws.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD SATISFY HIMSELF AS TO THE INCOME
AND OTHER TAX CONSIDERATIONS AND CONSEQUENCES OF HIS PARTICIPATION IN THE
COMPANY BY CONSULTING HIS OWN TAX ADVISOR BEFORE PURCHASING COMMON SHARES.
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.
The Company has elected to be taxed as a REIT for Federal income tax
purposes commencing with its tax year ended December 31, 1993 and for each
subsequent taxable year. Based on the assumptions and representations summarized
below, Winstead Sechrest & Minick P.C., counsel to the Company, is of the
opinion that the Company has been organized in conformity with the requirements
for qualification as a REIT for Federal income tax purposes and that its
anticipated investments and its plan of operation (which plan includes complying
with all of the REIT requirements described in this Prospectus) will enable it
to continue
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<PAGE> 52
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 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
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and will demand from shareholders written statements concerning the actual
and constructive beneficial ownership of Common Shares. Any shareholder who
does not provide the Company with required information concerning share
ownership will be required to include certain information relating thereto
with his income tax return.
2. Asset Diversification. At the close of each quarter of the taxable
year, at least 75% of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in
real property, mortgages on real property and certain temporary
investments), cash, cash items and U.S. Government securities (the "75%
Asset Test"). In addition, at those times, the remaining 25% of the value
of the Company's total assets may not consist, in whole or in part, of
securities in respect of any one issuer in an amount greater in value than
5% of the value of the Company's total assets or more than 10% of the
outstanding voting securities of such issuer (the "25% Asset Test"). If the
Company is in violation of the foregoing requirements (due to a discrepancy
between the value of its investments and such requirements) after the
acquisition of any security or property, then the Company will be treated
as not violating the requirements if it cures the violation within 30 days
of the close of the quarter.
While the Investment Manager intends to manage the Company to meet the
75% Asset Test and 25% Asset Test, no assurance can be given that the
Company will be able to do so.
The assets of the Company's wholly-owned subsidiaries will be
attributed directly to the Company for purposes of the asset
diversification rules.
3. Sources of Income. The Company must satisfy three distinct
income-based tests for each taxable year: the "75% Income Test," the "95%
Income Test" and the "30% Income Test."
The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable
year consist of certain types of income identified in the Code, including
qualifying rents from real property; qualifying interest on obligations
secured by mortgages on real property or interests in real property; gain
from the sale or other disposition of real property (including interests in
real property and mortgages on real property) held for investment and not
primarily for sale to customers in the ordinary course of business; income
and gain from certain properties acquired by the Company through
foreclosure; and income earned from certain qualifying types of temporary
investments. Income earned from qualifying temporary investments means
income that is (i) attributable to stock or debt instruments, (ii)
attributable to the temporary investment of capital received by the Company
from the issuance of shares of beneficial interests or from a public
offering of debt securities that have a maturity of at least five years,
and (iii) received or accrued within one year from the date the Company
receives such capital. Interest income and gain realized from the
disposition of loans which are secured solely by real property will
constitute qualifying income for purposes of the 75% Income Test, assuming
that such interest income is not excluded from the calculation of interest
for purposes of the 75% Income Test by reason of such interest being
dependent on income or profits as described in Code Section 856(f) and
assuming that any such loan which is disposed of is held for investment and
not primarily for sale to customers in the ordinary course of a trade or
business.
Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year
must consist of income which qualifies under the 75% Income Test as well as
dividends and interest from any other source, gain from the sale or other
disposition of stock and other securities which is not dealer property, any
payment to the Company under an interest rate swap or cap agreement entered
into as a hedge against variable rate indebtedness incurred to acquire or
carry real estate assets, and any gain from the disposition of such an
agreement.
Finally, under the 30% Income Test, the Company must limit its
realization of certain types of income so that, in each taxable year, less
than 30% of its gross income is derived from sale or other disposition of
(a) stock or securities held for less than one year (which includes an
interest rate swap or cap agreement entered into by the Company as a hedge
against any variable rate indebtedness incurred to acquire or carry real
estate assets), (b) with certain limited exceptions, real property
(including interests
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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. The conditions that must be satisfied include (i)
disclosure of each item of income in the REIT's tax return, (ii) any
incorrect information regarding each item of income must not be due to
fraud, and (iii) the failure to satisfy the tests must be due to reasonable
cause and not due to willful neglect. While satisfaction of the conditions
would prevent the Company from losing its tax status as a REIT, the Company
generally would be liable for a special tax with respect to the amount of
the Company's income which is nonqualifying for purposes of the 75% Income
Test or the 95% Income Test. The Code does not provide for any mitigation
provisions with respect to the 30% Income Test. Accordingly, if the Company
failed to meet the 30% Income Test, its tax status as a REIT would
terminate automatically.
4. Distribution Requirements. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum
of 95% of its "REIT taxable income" (as that term is defined under Section
857(b) of the Code), excluding any net capital gain ("net investment
income"), and 95% of its net income from "foreclosure property" in excess
of the Federal income tax from such income, minus certain items of noncash
income. As noted in "Dividends and Distributions Policy," the Company
distributes substantially all of its net investment income annually. The
Company likewise distributes annually substantially all of its realized net
capital gains. The Service may waive the distribution requirements for any
tax year if the Company establishes that it was unable to meet such
requirements by reason of distributions previously made to meet the
requirement of section 4981 of the Code (relating to the 4% Federal excise
tax on undistributed income discussed below).
Unlike net investment income, the Company's net capital gain need not
be distributed in order for the Company to maintain its status under the
Code as a REIT; however, the Company will be taxable on any net capital
gain and net investment income which it fails to distribute in a timely
manner under Code rules.
While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash
flow or otherwise has excessive noncash income or nondeductible
expenditures. Furthermore, the distribution requirement may be determined
not to have been met in a given year by reason of the Service later
successfully challenging the deductibility of a Company expenditure. In
such event, however, it may be possible to cure a failure to meet the
distribution requirement with a "deficiency dividend," but if the Company
uses that procedure, it may incur substantial tax penalties and interest.
The Company will be subject to a nondeductible 4% Federal excise tax
with respect to undistributed ordinary income and capital gain net income
unless it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains
in excess of its capital losses (subject to certain adjustments) and (c)
any ordinary income and capital gain net income not distributed in prior
calendar years. The Company intends to make distributions to shareholders
so that it will not incur this tax but, as noted above, various situations
could make it impractical to meet the prescribed distribution schedule.
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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.
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
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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.
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.
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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.
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
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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 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 investments that are authorized by the
appropriate governing instruments.
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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.
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<PAGE> 60
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:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
-------------------------------------------------------------------------------------
<S> <C>
Oppenheimer & Co., Inc..................................................
J.C. Bradford & Co......................................................
Fahnestock & Co. Inc....................................................
---------
Total................................................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel, and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above Common Shares if any are purchased.
The Underwriters propose to offer the Common Shares directly to the public
at the public offering price set forth on the cover page of this Prospectus, and
at such price less a concession not in excess of $ per share to certain
other dealers who are members of the National Association of Securities Dealers,
Inc. The Underwriters may allow, and such dealers may re-allow, concessions not
in excess of $ per share to certain other dealers. The offering price
and other selling terms may be changed by the Underwriters.
The Underwriters have been granted a 30-day over-allotment option to
purchase up to an aggregate of 300,000 additional Common Shares, exercisable at
the public offering price less the underwriting discount. If the Underwriters
exercise such over-allotment option, then each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of Common Shares to be purchased by it as
shown in the above table bears to the 2,000,000 Common Shares offered hereby.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Shares offered hereby. The
Representatives of the Underwriters have informed the Company that they do not
expect the Underwriters to confirm sales of Common Shares offered hereby to
accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities Act
of 1933, 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 on the purchase of
Common Shares by the Underwriters
58
<PAGE> 61
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.
59
<PAGE> 62
GLOSSARY
The following terms as used in this Prospectus are briefly defined below:
Annual Fee.................... For each calendar year during which the
Company's annual Return on Average Common
Equity Capital after deduction of the Base
Fee (the "Actual Return") exceeds 6.69% (the
"Minimum Return"), the Company will pay the
Investment Manager an additional advisory fee
equal to the product determined by
multiplying the Average Annual Value of All
Invested Assets by a percentage equal to the
difference between the Actual Return and the
Minimum Return, up to a maximum of one
percent (1%) per annum. The Annual Fee will
be earned only to the extent that the annual
Return on Average Common Equity Capital after
deduction of the Base Fee and Annual Fee is
at least equal to the Minimum Return.
Average Annual Value of All
Assets........................ The book value of total assets determined in
accordance with GAAP on the first day of the
year and on the last day of each quarter of
such year, divided by five.
Average Annual Value of All
Invested Assets............. The book value of Invested Assets determined in
accordance with GAAP on the first day of the
year and on the last day of each quarter of
such year, divided by five.
Average Common Equity
Capital....................... The Common Equity Capital on the first day of
the year and on the last day of each quarter
of such year, divided by five.
Average Quarterly Value of
All Assets.................. The book value of total assets determined in
accordance with GAAP on the first day of the
quarter and on the last day of the quarter,
divided by two.
Average Quarterly Value of All
Invested Assets............. The book value of Invested Assets determined in
accordance with GAAP on the first day of the
quarter and on the last day of the quarter,
divided by two.
Base Fee...................... Quarterly in arrears, a fee consisting of a
quarterly servicing fee of .125% of the
Average Quarterly Value of All Assets and a
quarterly advisory fee of .25% of the Average
Quarterly Value of All Invested Assets.
Common Equity Capital......... The sum of the stated capital plus the
additional paid-in capital for the Common
Shares.
Dividend Reinvestment Plan.... The plan adopted by the Company pursuant to
which dividends and other Plan cash
distributions are automatically invested by
the Plan Agent for the account of a
shareholder electing to participate in the
Plan in additional newly issued Common Shares
of the Company.
GAAP.......................... Generally accepted accounting principles.
Independent Trust Managers.... The trust managers of the Company who are not
affiliated with PMC Capital or its
subsidiaries.
Invested Assets............... The Primary Investments plus the Other
Investments.
60
<PAGE> 63
Other Investments............. The Company's investments in (i) loans which
are current at the time of the Company's
commitment to purchase, acquired from certain
governmental agencies and other sellers,
which meet the Company's underwriting
criteria, (ii) other commercial loans secured
by real estate, and (iii) real estate.
Primary Investments........... Loans to small businesses secured by the first
liens on real estate, originated by the
Company to borrowers who meet the Company's
underwriting criteria.
Retained Earnings............. The sum of cumulative net income and cumulative
dividends paid.
Return on Average Common
Equity Capital.............. Net income of the Company as determined in
accordance with GAAP, less preferred
dividends, if any, divided by the Average
Common Equity Capital.
61
<PAGE> 64
PMC COMMERCIAL TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996..... F-3
Consolidated Statements of Income for the period June 4, 1993 (date of inception) to
December 31, 1993, the years ended December 31, 1994 and 1995, and the three
months ended March 31, 1995 and 1996............................................. F-4
Consolidated Statements of Beneficiaries' Equity for the period June 4, 1993 (date
of inception) to December 31, 1993, the years ended December 31, 1994 and 1995,
and the three months ended March 31, 1996........................................ F-5
Consolidated Statements of Cash Flows for the period June 4, 1993 (date of
inception) to December 31, 1993, the years ended December 31, 1994 and 1995, and
the three months ended March 31, 1995 and 1996................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 65
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> 66
PMC COMMERCIAL TRUST
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Investments:
Loans receivable, net................................. $32,693,752 $59,129,536 $62,957,636
Cash equivalents...................................... 18,809,314 173,679 16,830,812
Restricted investments................................ -- -- 2,411,276
----------- ----------- -----------
Total investments....................................... 51,503,066 59,303,215 82,199,724
----------- ----------- -----------
Other assets:
Cash.................................................. 40,789 33,504 173,946
Interest receivable................................... 208,525 410,073 384,055
Deferred borrowing costs.............................. -- -- 357,754
Other assets, net..................................... 32,141 50,483 50,000
----------- ----------- -----------
Total other assets...................................... 281,455 494,060 965,755
----------- ----------- -----------
Total assets............................................ $51,784,521 $59,797,275 $83,165,479
=========== =========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable......................................... $ -- $ 7,920,000 $29,500,000
Dividends payable..................................... 1,033,659 1,518,896 1,310,166
Accounts payable...................................... -- 14,175 5,859
Interest payable...................................... -- 56,267 227,921
Borrower advances..................................... 2,346,162 579,133 1,106,265
Unearned commitment fees.............................. 560,728 599,978 816,611
Due to affiliates..................................... 184,523 844,786 1,043,627
Unearned construction monitoring fees................. 219,048 81,008 154,061
----------- ----------- -----------
Total liabilities....................................... 4,344,120 11,614,243 34,164,510
----------- ----------- -----------
Commitments and contingencies (Note 9)
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 3,444,530,
3,491,716 and 3,540,988 shares issued and
outstanding at December 31, 1994, December 31, 1995
and March 31, 1996, respectively................... 34,445 34,917 35,410
Additional paid-in capital............................ 47,704,383 48,326,337 49,109,477
Cumulative net income................................. 3,215,294 8,111,318 9,455,788
Cumulative dividends.................................. (3,513,721) (8,289,540) (9,599,706)
----------- ----------- -----------
Total beneficiaries' equity............................. 47,440,401 48,183,032 49,000,969
----------- ----------- -----------
Total liabilities and beneficiaries' equity............. $51,784,521 $59,797,275 $83,165,479
=========== =========== ===========
Net asset value per share............................... $ 13.77 $ 13.80 $ 13.84
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 67
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JUNE 4, 1993
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1993 1994 1995 1995 1996
------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income -- loans........ $ 3,039 $2,289,355 $5,610,391 $1,106,929 $1,795,603
Interest and dividends -- other
investments.................. 12,678 1,221,768 324,779 230,617 54,348
Other income.................... -- 179,649 295,245 84,002 56,835
--------- ---------- ---------- ---------- ----------
Total revenues.................... 15,717 3,690,772 6,230,415 1,421,548 1,906,786
--------- ---------- ---------- ---------- ----------
Expenses:
Advisory and servicing fees,
net.......................... -- 357,311 945,720 160,730 276,092
Legal and accounting fees....... -- 32,628 70,940 26,143 9,190
General and administrative...... 565 63,543 96,028 33,116 25,265
Interest........................ -- 37,148 221,703 16,435 251,769
--------- ---------- ---------- ---------- ----------
Total expenses.................... 565 490,630 1,334,391 236,424 562,316
--------- ---------- ---------- ---------- ----------
Net income........................ $15,152 $3,200,142 $4,896,024 $1,185,124 $1,344,470
========= ========== ========== ========== ==========
Weighted average shares
outstanding..................... 3,099,530 3,430,009 3,451,091 3,444,530 3,519,612
========= ========== ========== ========== ==========
Net income per share.............. $ 0.01 $ 0.93 $ 1.42 $ 0.34 $ 0.38
========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 68
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON
SHARES OF ADDITIONAL CUMULATIVE TOTAL
BENEFICIAL PAR PAID-IN NET CUMULATIVE BENEFICIARIES'
INTEREST VALUE CAPITAL INCOME DIVIDENDS EQUITY
---------- ------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 4, 1993 (Inception)......... -- $ -- $ -- $ -- $ -- $ --
Shares issued upon formation............. 200 2 2,788 -- -- 2,790
Initial shares sold to public............ 3,000,000 30,000 44,970,000 -- -- 45,000,000
Initial shares sold through direct
offering............................... 99,330 993 1,384,660 -- -- 1,385,653
Issuance costs........................... -- -- (3,462,365) -- -- (3,462,365)
Net income............................... -- -- -- 15,152 -- 15,152
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1993................ 3,099,530 30,995 42,895,083 15,152 -- 42,941,230
Additional shares sold through initial
public offering........................ 345,000 3,450 5,171,550 -- -- 5,175,000
Issuance costs........................... -- -- (362,250) -- -- (362,250)
Dividends ($1.02 per share).............. -- -- -- -- (3,513,721) (3,513,721)
Net income............................... -- -- -- 3,200,142 -- 3,200,142
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1994................ 3,444,530 34,445 47,704,383 3,215,294 (3,513,721) 47,440,401
Shares issued through exercise of
stock options.......................... 12,996 130 122,836 -- -- 122,966
Shares issued through dividend
reinvestment plan...................... 34,190 342 499,118 -- -- 499,460
Dividends ($1.38 per share).............. -- -- -- -- (4,775,819) (4,775,819)
Net income............................... -- -- -- 4,896,024 -- 4,896,024
--------- ------- ----------- ---------- ----------- ------------
Balances, December 31, 1995................ 3,491,716 34,917 48,326,337 8,111,318 (8,289,540) 48,183,032
Shares issued through exercise of
stock options.......................... 1,675 17 19,874 -- -- 19,891
Shares issued through dividend
reinvestment plan...................... 47,597 476 763,266 -- -- 763,742
Dividends ($0.37 per share).............. -- -- -- -- (1,310,166) (1,310,166)
Net income............................... -- -- -- 1,344,470 -- 1,344,470
--------- ------- ----------- ---------- ----------- ------------
Balances, March 31, 1996 (unaudited)....... 3,540,988 $35,410 $49,109,477 $9,455,788 $(9,599,706) $ 49,000,969
========= ======= =========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 69
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JUNE 4, 1993
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 15,152 $ 3,200,142 $ 4,896,024 $ 1,185,124 $ 1,344,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of:
Government securities....................... -- (80,384) -- -- --
Discount on purchased loans................. -- (22,094) (26,460) (6,347) (7,074)
Deferred commitment fees.................... -- (166,200) (196,951) (55,968) (51,151)
Construction monitoring fees................ -- (39,946) (146,054) (32,342) (29,451)
Amortization of organization costs............ -- 8,040 8,040 2,010 2,011
Commitment fees collected..................... 97,010 1,295,419 546,211 107,466 261,512
Construction monitoring fees collected, net... -- 258,994 8,014 (27,449) 102,504
Changes in operating assets and liabilities:
Accrued interest receivable................. (40,181) (208,525) (201,548) (53,493) 26,018
Other assets................................ -- -- (26,382) -- (359,282)
Interest payable............................ -- -- 56,267 -- 171,654
Borrower advances........................... -- 2,346,162 (1,767,029) (74,657) 527,132
Due to affiliates........................... 24,557 159,966 660,263 61,440 198,841
Accounts payable............................ 187,115 (187,655) 14,175 -- (8,316)
------------ ------------ ------------ ----------- ------------
Net cash provided by operating activities......... 283,653 6,563,919 3,824,570 1,105,784 2,178,868
------------ ------------ ------------ ----------- ------------
Cash flows from investing activities:
Loans funded/purchased.......................... (3,215,660) (34,982,484) (31,711,230) (9,327,981) (4,830,062)
Principal collected............................. -- 4,861,525 4,991,896 2,341,401 1,015,308
Redemption (purchase) of Government
securities.................................... (4,919,616) 5,000,000 -- -- --
Investment in restricted cash................... -- -- -- -- (2,411,276)
------------ ------------ ------------ ----------- ------------
Net cash used in investing activities............. (8,135,276) (25,120,959) (26,719,334) (6,986,580) (6,226,030)
------------ ------------ ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common shares......... 46,388,443 5,175,000 582,107 -- 749,290
Proceeds from issuance of notes payable......... -- -- 9,130,000 -- 33,740,000
Payment of dividends............................ -- (2,480,062) (4,250,263) (1,033,359) (1,484,553)
Payment of issuance costs....................... (3,462,365) (362,250) -- -- --
Payment of principal on notes payable........... -- -- (1,210,000) -- (12,160,000)
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in) financing
activities...................................... 42,926,078 2,332,688 4,251,844 (1,033,359) 20,844,737
------------ ------------ ------------ ----------- ------------
Net (decrease) in cash and cash equivalents....... 35,074,455 (16,224,352) (18,642,920) (6,914,155) 16,797,575
Cash and cash equivalents, beginning of period.... -- 35,074,455 18,850,103 18,850,103 207,183
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents, end of period.......... $ 35,074,455 $ 18,850,103 $ 207,183 $11,935,948 $ 17,004,758
============ ============ ============ =========== ============
Supplemental disclosures:
Dividends reinvested............................ $ -- $ -- $ 40,319 $ -- $ 34,343
============ ============ ============ =========== ============
Dividends declared, not paid.................... $ -- $ 1,033,659 $ 1,518,896 $ 1,033,359 $ 1,310,166
============ ============ ============ =========== ============
Interest paid................................... $ -- $ 37,148 $ 165,436 $ -- $ 80,115
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 70
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE FINANCIAL DATA AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General:
PMC Commercial Trust (the "Company") was organized on June 4, 1993, as a
Texas real estate investment trust created primarily to originate loans to small
business enterprises which are collateralized by first liens on real estate. The
shares of the Company are traded on the American Stock Exchange (Symbol "PCC").
The Company follows the accounting practices prescribed in Statement of Position
75-2 "Accounting Practices of Real Estate Investment Trusts." The Company's
principal investment objective is to obtain current income from interest
payments and other related fee income on collateralized business loans. The
Company's investment advisor is PMC Advisers, Inc. ("PMC Advisers" or the
"Investment Manager"), a wholly-owned subsidiary of PMC Capital, Inc. ("PMC
Capital"), a regulated investment company traded on the American Stock Exchange
(symbol "PMC"). The Company intends to maintain its qualified status as a real
estate investment trust ("REIT") for Federal income tax purposes.
Consolidated Financial Statements:
On March 7, 1996, PMC Commercial Receivable Limited Partnership, a Delaware
limited partnership ("PCR" or the "Partnership") and PMC Commercial Corp., a
Delaware corporation, were formed. PMC Commercial Corp. is the general partner
for PCR. The financial statements at March 31, 1996 and for the three months
then ended include the accounts of PMC Commercial Trust, PMC Commercial Corp.
and PCR. PMC Commercial Trust owns 100% of PMC Commercial Corp. and directly or
indirectly all of the partnership interests of PCR (see Note 10).
Use of Estimates in the Preparation of Financial Statements:
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.
Loans Receivable:
Loans receivable are carried at their outstanding principal balance less
any discounts, deferred fees net of related costs, and loan loss reserves. A
loan loss reserve is established based on a determination, through an evaluation
of the recoverability of individual loans, by the Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. To date, no
loan loss reserves have been established. The determination of whether
significant doubt exists and whether a loan loss provision is necessary for each
loan requires judgment and considers the facts and circumstances existing at the
evaluation date. Changes to the facts and circumstances of the borrower, the
lodging industry and the economy may require the establishment of additional
loan loss reserves in proportion to the potential loss.
Deferred fee revenue is included in the carrying value of loans receivable
and consists of non-refundable fees less certain direct loan origination costs
which are being recognized over the life of the related loan as an adjustment of
yield.
Deferred Organization Costs:
Costs incurred by the Company in connection with its organization are being
amortized on a straight-line basis over a five year period.
F-7
<PAGE> 71
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes:
The Company intends to maintain its qualified status as a REIT under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to remain qualified as a REIT under the Code, the Company must elect to be
a REIT and must satisfy various requirements in each taxable year, including,
among others, limitations on share ownership, asset diversification, sources of
income, and distribution of income. By qualifying, the Company will not be
subject to Federal income taxes to the extent that it distributes at least 95%
of its taxable income in the fiscal year. Management of the Company believes it
has satisfied the various requirements to remain qualified as a REIT.
Interest Income:
Interest income is recorded on the accrual basis to the extent that such
amounts are deemed collectible. The Company's policy is to suspend the accrual
of interest income when a loan becomes 60 days delinquent.
Construction Monitoring Fees:
Fees related to the Company's construction monitoring activities are
recognized based on the percentage of project completion over the construction
period and is included in other income in the accompanying consolidated
statements of income.
Statement of Cash Flows:
The Company generally considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents for the
statement of cash flows. Cash and cash equivalents consists of cash equivalents
reflected in the Investments section of the balance sheet and cash reflected in
the Other Assets section of the balance sheet.
Per Share Data:
Net income per share is based on the weighted average number of common
shares of beneficial interest outstanding during the period.
Reclassification:
Certain prior period amounts have been reclassified to conform to current
period presentation.
Statements of Financial Accounting Standards ("SFAS"):
In 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." These pronouncements are effective for fiscal years beginning
after December 15, 1994. These statements provide income recognition criteria on
loans and generally require creditors to value certain impaired and restructured
loans at the present value of the expected future cash flows, discounted at the
loan's effective interest rate, or at fair value of the collateral if the loan
is collateral dependent. Implementing SFAS No. 114 and SFAS No. 118 did not have
an effect on the Company's financial statements.
In 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) or to recognize compensation expense for
grants of stock, stock options, and other equity instruments to employees based
on fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earnings per
share
F-8
<PAGE> 72
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as if the fair value based accounting prescribed by SFAS No. 123 has been
applied. The Company has elected to continue expense recognition pursuant to APB
No. 25. SFAS No. 123 is effective for fiscal years beginning after December 15,
1995.
Interim Financial Statements:
The accompanying consolidated financial statements of PMC Commercial Trust
and its subsidiaries as of and for the three months ended March 31, 1995 and
1996 is unaudited. In the opinion of the Company's management, the consolidated
financial statements reflect all adjustments necessary to present fairly the
financial position at March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1995 and 1996. These adjustments are
of a normal recurring nature.
NOTE 2. LOANS RECEIVABLE:
The Company primarily originates loans: (i) to small business enterprises
that exceed the net worth, asset, income, number of employee or other
limitations applicable to the Small Business Administration ("SBA") programs
utilized by PMC Capital or (ii) in excess of $1.1 million to small business
enterprises without regard to SBA eligibility requirements. Such loans are
collateralized by first liens on real estate and are subject to the Company's
underwriting criteria.
The principal amount of loans originated by the Company have not exceeded
70% of the lesser of fair value or cost of the real estate collateral unless
credit enhancements such as additional collateral or third party guarantees were
obtained. Loans originated or purchased by the Company typically provide
interest payments at fixed rates, although the Company may also originate and
purchase variable rate loans. Loans generally have maturities ranging from five
to 10 years. Most loans provide for scheduled amortization and often have a
balloon payment requirement. In most cases, borrowers are entitled to prepay all
or part of the principal amount subject to a prepayment penalty depending on the
terms of the loan.
During the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1996, the Company originated 38, 31 and 4 loans, respectively,
to corporations, partnerships or individuals. During the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, the Company funded
approximately $33.6, $31.7 and $4.8 million and collected commitment fees of
approximately $1.3 million, $546,000 and $262,000, respectively.
During the year ended December 31, 1994, the Company purchased loans with a
face value of $1,502,005, for $1,325,113 from the U.S. Government and/or its
agents. The discount on these loans is netted against loans receivable and is
being amortized over the remaining life of the loans on the interest method.
During the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1996, approximately $22,000, $26,000 and $7,000 of the discount has
been recognized as interest income, respectively.
At March 31, 1996, approximately 31% and 11% of the Company's loan
portfolio consisted of loans to borrowers in Texas and Maryland, respectively.
At December 31, 1995, approximately 32% and 12% of the Company's loan portfolio
consisted of loans to borrowers in Texas and Maryland, respectively.
Approximately 38%, 11% and 10% of the Company's loan portfolio as of December
31, 1994 consisted of loans to borrowers in Texas, Maryland and Pennsylvania,
respectively. No other state had a concentration of 10% or greater at March 31,
1996, December 31, 1995 or December 31, 1994. The Company's loan portfolio was
approximately 92%, 96% and 96% concentrated in the lodging industry at December
31, 1994 and 1995 and March 31, 1996, respectively.
In connection with the origination of a loan, the Company charges a
commitment fee. In accordance with SFAS No. 91, this non-refundable fee, less
the direct costs associated with the origination, is deferred and is included as
a reduction of the carrying value of loans receivable. These net fees are being
recognized as
F-9
<PAGE> 73
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income over the life of the related loan as an adjustment of yield. The Company
had $664,962, $974,971 and $968,699 in deferred commitment fees at December 31,
1994 and 1995 and March 31, 1996, respectively.
NOTE 3. DUE TO AFFILIATE:
The investments of the Company are managed by PMC Advisers. Pursuant to an
investment management agreement between the Company and the Investment Manager
(the "Investment Management Agreement"), the Company is obligated to pay to the
Investment Manager, quarterly in arrears, a base fee (the "Base Fee") consisting
of a quarterly servicing fee of 0.125% of the average quarterly value of all
assets (as defined in the Investment Management Agreement), representing on an
annual basis approximately 0.5% of the average annual value of all assets (as
defined in the Investment Management Agreement), and a quarterly advisory fee of
0.25% of the average quarterly value of all invested assets (as defined in the
Investment Management Agreement), representing on an annual basis approximately
1% of the average annual value of all invested assets (as defined in the
Investment Management Agreement). In addition, commencing January 1, 1994, for
each calendar year during which the Company's annual return on average equity
capital (as defined in the Investment Management Agreement) after deduction of
the Base Fee (the "Actual Return") exceeds 6.69% (the "Minimum Return"), the
Company will pay to the Investment Manager, as incentive compensation, an
additional advisory fee (the "Annual Fee") equal to the product determined by
multiplying the average annual value of all invested assets (as defined in the
Investment Management Agreement) by a percentage equal to the difference between
the Actual Return and the Minimum Return, up to a maximum of one percent (1%)
per annum. The Annual Fee will be earned only to the extent that the annual
return on average common equity capital (as defined in the Investment Management
Agreement) after deduction of the Base Fee and Annual Fee is at least equal to
the Minimum Return. All such advisory fees will be reduced to fifty percent with
respect to the value of Invested Assets that exceed common beneficiaries' equity
as a result of leverage or the issuance of preferred shares.
Pursuant to the Investment Management Agreement, the Company incurred fees
of $429,000, $1,189,000 and $356,000 based upon average value of all assets of
$48,993,937, $53,884,788 and $66,172,702 and average value of all invested
assets of $18,922,343, $46,756,497 and $60,669,030, for the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, respectively.
Pursuant to the Investment Management Agreement, the Company was not obligated
to pay advisory fees to the Investment Manager from inception through June 30,
1994. Of the amount of service and advisory fees paid or payable to the
Investment Manager as of December 31, 1994 and 1995 and March 31, 1996, $71,500,
$244,000 and $80,000, respectively, have been offset against commitment fees as
a direct cost of originating loans (see NOTE 2).
NOTE 4. BORROWER ADVANCES:
The Company finances projects during the construction phase. At December
31, 1994 and 1995 and March 31, 1996, the Company was in the process of funding
approximately $16.1 million, $15.9 million and $21.6 million in construction
projects, respectively, of which $11.4 million, $9.2 million and $11.7 million
in future fundings remain, respectively. As part of the monitoring process to
verify that the borrowers' cash equity is utilized for its intended purpose, the
Company receives funds from the borrowers and releases funds upon presentation
of appropriate supporting documentation. At December 31, 1994 and 1995 and March
31, 1996, the Company had $2.3 million, $579,000 and $1.1 million, respectively,
in funds held on behalf of borrowers which is included as a liability in the
accompanying consolidated balance sheet. The Company will use cash, cash
equivalents or available advances under its revolving credit facility to fund
these obligations.
F-10
<PAGE> 74
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. NET INCOME PER SHARE:
The weighted average number of common shares of beneficial interest
outstanding were 3,099,530, 3,430,009 and 3,451,091 for the periods ended
December 31, 1993, 1994 and 1995, respectively. The weighted average number of
common shares of beneficial interest outstanding were 3,444,530 and 3,519,612
for the three months ended March 31, 1995 and 1996, respectively. Net income per
share for the period ended December 31, 1993 is based on the weighted average
number of common shares of beneficial interest outstanding during the period
December 27, 1993 (commencement of operations) to December 31, 1993. The
weighted average number of common shares of beneficial interest outstanding
during the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1995 and 1996 were not affected by outstanding options, as such
options were anti-dilutive or immaterial (see NOTE 8).
NOTE 6. BENEFICIARIES' EQUITY:
During January 1994, the Company sold 345,000 additional common shares of
beneficial interest pursuant to the exercise by the underwriters of
over-allotment options relating to the initial public offering for net proceeds,
after underwriting discount, of approximately $4.8 million.
As part of the requirements of qualifying for REIT status under the Code,
the Company must distribute to its shareholders at least 95% of its income for
Federal income tax purposes ("Taxable Income") within established time
requirements of the Code. If these requirements are not met, the Company will be
subject to Federal income taxes and/or excise taxes. As a result of a timing
difference for the recognition of income with respect to fees collected at the
inception of originating loans, the Company's Taxable Income exceeds net income
in accordance with generally accepted accounting principals ("GAAP"). In order
not to incur any tax liability, the Company has declared or distributed the
required amount of taxable income as dividends to its shareholders. For Federal
income tax purposes, these dividends do not represent a return of capital.
NOTE 7. DIVIDEND REINVESTMENT PLAN:
The Company filed a registration statement with the Securities and Exchange
Commission to implement its dividend reinvestment plan. The registration
statement was declared effective by the Securities and Exchange Commission on
January 13, 1995. During the year ended December 31, 1995 and the three months
ended March 31, 1996, 34,190 and 47,597 shares were issued pursuant to the plan,
respectively.
F-11
<PAGE> 75
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. SHARE OPTION PLANS:
In accordance with the 1993 Employees Share Option Plan (the "Employees
Plan") and Trust Managers Share Option Plan (the "Trust Managers Plan"), adopted
by the Company, options to purchase up to 180,000 shares in aggregate can be
granted to directors, officers or key employees.
The grants outstanding at December 31, 1995 are:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE DATE OF GRANT EXERCISE DATE EXPIRATION DATE
- --------- -------- ----------------- ----------------- -----------------
<C> <C> <S> <C> <C>
4,000 $ 15.000 December 17, 1993 December 17, 1994 December 17, 1998
2,000 $ 14.625 May 10, 1994 May 10, 1995 May 10, 1999
7,665 $ 11.875 December 10, 1994 December 10, 1995 December 10, 1999
31,770 $ 11.875 December 10, 1994 December 10, 1996 December 10, 1999
2,000 $ 11.750 December 17, 1994 December 17, 1995 December 17, 1999
1,000 $ 14.125 May 10, 1995 May 10, 1996 May 10, 2000
2,000 $ 15.750 December 17, 1995 December 17, 1996 December 17, 2000
12,000 $ 15.750 December 15, 1995 January 15, 1997 December 15, 2000
4,940 $ 15.750 December 15, 1995 December 15, 1996 December 15, 2000
4,940 $ 15.750 December 15, 1995 December 15, 1997 December 15, 2000
</TABLE>
Employees Plan:
As of December 31, 1995, 86,020 share options had been granted, net of
shares cancelled in 1994 as detailed below. During December 1995, 12,996 shares
were exercised at $11.875. In addition, 11,109 shares expired or were cancelled
pursuant to the plan during the year ended December 31, 1995. The number of
shares exercisable at December 31, 1995 and March 31, 1996 was 7,665 and 5,990,
respectively.
In December 1994, the Board of Trust Managers allowed the officers and
employees holding existing options to elect to participate in an exchange of
options as of December 10, 1994, whereby the then-outstanding options could be
cancelled and, in lieu thereof, new options could be granted at an exchange rate
of 0.6 new shares per share previously granted. As a result, 39,400 options were
cancelled and 23,640 new options were issued.
Trust Managers Plan:
Only the trust managers who are not affiliated with PMC Capital or the
Investment Manager (the "Independent Trust Managers") are eligible to
participate in the Trust Managers Plan which provides for the grant of
nonqualified share options covering up to an aggregate of 20,000 shares. The
Trust Managers Plan is a nondiscretionary plan pursuant to which options to
purchase 2,000 shares are granted to each Independent Trust Manager on the date
such trust manager takes office. In addition, options to purchase 1,000 shares
are granted each year thereafter on the anniversary of the date the trust
manager took office so long as such trust manager is re-elected to serve as a
trust manager. Such options will be exercisable at the fair market value of the
shares on the date of grant. The options granted under the Trust Managers Plan
become exercisable one year after date of grant and expire if not exercised on
the earlier of (i) 30 days after the option holder no longer holds office as an
Independent Trust Manager for any reason or (ii) within five years after date of
grant. The number of shares exercisable at both December 31, 1995 and March 31,
1996 was 8,000.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
Commitments to extend credit are agreements to lend to a customer provided
that the terms established in the contract are met. The Company had
approximately $7.1 million and $19.2 million of loan commitments outstanding to
6 corporations and 15 corporations, partnerships or individuals in the lodging
industry at
F-12
<PAGE> 76
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and March 31, 1996, respectively. The weighted average
contractual interest rate on these loan commitments at December 31, 1995 and
March 31, 1996 was 10.95% and 10.57%, respectively. In addition, at December 31,
1995 and March 31, 1996 the Company had $6.5 million and $8.5 million of loan
commitments outstanding on 12 and 13 partially funded construction loans,
respectively, and approximately $1.9 million and $8.0 million of loan
commitments outstanding on SBA Section 504 program loans, respectively. The
above commitments are made in the ordinary course of the Company's business and
in management's opinion, are generally on the same terms as those to existing
borrowers. Commitments generally have fixed expiration dates and require payment
of a fee. Since some commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. To the extent the Company has available funds, an additional $15.2
million in commitments in the lodging industry issued by the Investment Manager
as of March 31, 1996, with a weighted average interest rate of 10.64% will be
funded by the Company. Pursuant to the Investment Management Agreement, should
the Company not have funds available for commitments, such commitments will be
referred to affiliated entities.
In the normal course of business, the Company is subject to various
proceedings and claims, the resolution of which will not, in management's
opinion, have a material adverse effect on the Company's financial position or
results of operations.
NOTE 10. NOTES PAYABLE:
During 1995, the Company completed an arrangement for a revolving credit
facility providing the Company with funds to originate loans collateralized by
commercial real estate. This credit facility provides to the Company up to the
lesser of $20 million or an amount equal to 50% of the value of the underlying
property collateralizing the borrowings. At December 31, 1995, the Company had
$7.9 million outstanding under the credit facility with availability of an
additional $12.1 million. The Company is charged interest on the balance
outstanding under the credit facility, at the option of the Company, at either
the prime rate of the lender less 50 basis points or 200 basis points over the
30, 60 or 90 day LIBOR. At December 31, 1995, the weighted average interest rate
on short-term borrowings under the revolving credit facility was 8.2%.
On March 12, 1996, a special purpose affiliate of the Company, PCR,
completed a private placement of $29,500,000 of its Fixed Rate Loan Backed
Notes, Series 1996-1 (the "Notes"). The Notes, issued at par, which mature in
2016 and bear interest at the rate of 6.72% per annum, are collateralized by
approximately $39.7 million of loans contributed by the Company to the
Partnership. In connection with this private placement, the Notes were given a
rating of "AA" by Duff and Phelps Credit Rating Co. The loans were originated or
purchased by the Company in accordance with the Company's lending strategy and
underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to the
Company or its assets in the event of nonpayment other than the loans
contributed to the Partnership and the restricted investments. The net proceeds
from this issuance of the Notes (approximately $27.1 million after giving effect
to costs of $500,000 and a $1.9 million deposit held by the trustee as
collateral) were distributed to the Company in accordance with its interest in
the Partnership. The Company used such proceeds to pay down all outstanding
borrowings under the Company's credit facility and intends to make additional
loans in accordance with its lending criteria.
F-13
<PAGE> 77
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS:
At December 31, 1995, the estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Assets:
Loans receivable, net................................... $59,129,536 $60,505,163
Cash equivalents........................................ 173,679 173,679
Cash.................................................... 33,504 33,504
Other Assets............................................ 436,445 436,445
Liabilities:
Notes payable........................................... 7,920,000 7,920,000
Other liabilities....................................... 3,553,237 3,553,237
</TABLE>
(a) Loans receivable, net
The estimated fair value for all fixed rate loans is estimated by
discounting the estimated cash flows using the current rate at which similar
loans would be made to borrowers with similar credit ratings and maturities.
The impact of delinquent loans on the estimation of the fair values
described above is not considered to have a material effect and accordingly,
delinquent loans have been disregarded in the valuation methodologies employed.
(b) Cash equivalents
The carrying amount is a reasonable estimation of fair value.
(c) Cash
The carrying amount is a reasonable estimation of fair value.
(d) Other assets
The carrying amount is a reasonable estimation of fair value.
(e) Notes payable
The carrying amount is a reasonable estimation of fair value since amounts
due under the revolving credit facility are variable rate, short term
obligations.
(f) Other liabilities
The carrying amount is a reasonable estimation of fair value.
F-14
<PAGE> 78
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following represents selected quarterly financial data of the Company;
which in the opinion of management, reflects adjustments (comprising only normal
recurring adjustments) necessary for fair presentation.
<TABLE>
<CAPTION>
1994
------------------------------------------
EARNINGS PER
REVENUES NET INCOME SHARE
---------- ---------- ------------
<S> <C> <C> <C>
First Quarter.................................. $ 490,596 $ 410,606 $ 0.12
Second Quarter................................. 778,500 665,075 0.19
Third Quarter.................................. 1,231,607 1,125,493 0.33
Fourth Quarter................................. 1,190,069 998,968 0.29
---------- ---------- ------
$3,690,772 $3,200,142 $ 0.93
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------
EARNINGS PER
REVENUES NET INCOME SHARE
---------- ---------- ------------
<S> <C> <C> <C>
First Quarter.................................. $1,421,548 $1,185,124 $ 0.34
Second Quarter................................. 1,414,668 1,128,282 0.33
Third Quarter.................................. 1,591,744 1,254,743 0.36
Fourth Quarter................................. 1,802,455 1,327,875 0.39
---------- ---------- ------
$6,230,415 $4,896,024 $ 1.42
========== ========== ======
</TABLE>
NOTE 13. SUBSEQUENT EVENT (UNAUDITED):
On April 23, 1996, the Company filed a registration statement on Form S-11
with the Securities and Exchange Commission to register for sale up to 2,360,000
common shares of beneficial interest. The registration is ongoing and there can
be no assurance that the registration statement will be declared effective or
that the Company will be able to sell any of the shares.
F-15
<PAGE> 79
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE COMPANY'S INVESTMENT MANAGER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................... 2
PROSPECTUS SUMMARY.......................... 3
RISK FACTORS................................ 7
USE OF PROCEEDS............................. 14
PRICE RANGE OF COMMON SHARES................ 14
DIVIDENDS AND DISTRIBUTIONS POLICY.......... 15
SELECTED FINANCIAL DATA..................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................ 19
BUSINESS.................................... 25
MANAGEMENT.................................. 37
INVESTMENT MANAGER.......................... 42
PRINCIPAL SHAREHOLDERS...................... 45
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST.................................. 46
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND
OF THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS.................................... 48
FEDERAL INCOME TAX CONSIDERATIONS........... 49
ERISA CONSIDERATIONS........................ 56
UNDERWRITING................................ 58
LEGAL MATTERS............................... 59
EXPERTS..................................... 59
GLOSSARY.................................... 60
INDEX TO FINANCIAL STATEMENTS............... F-1
</TABLE>
================================================================================
================================================================================
2,000,000 SHARES
PMC
COMMERCIAL TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
--------------------
PROSPECTUS
--------------------
OPPENHEIMER & CO., INC.
J.C. BRADFORD & CO.
FAHNESTOCK & CO. INC.
, 1996
================================================================================
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD fee and the American Stock Exchange listing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
--------------------------------------------------------------------------- --------
<S> <C>
Registration Fee -- Securities and Exchange Commission..................... $ 13,733
NASD Fee................................................................... 4,483
American Stock Exchange Listing Fee........................................ 17,500
Transfer Agent's and Registrar's Fees*..................................... 1,000
Printing and Engraving Fees*............................................... 80,000
Legal Fees and Expenses (other than Blue Sky)*............................. 75,000
Accounting Fees and Expenses*.............................................. 45,000
Blue Sky Fees and Expenses (including fees of counsel)*.................... 35,000
Travel Expense*............................................................ 15,000
Miscellaneous Expenses*.................................................... 13,284
--------
Total............................................................ $300,000
========
</TABLE>
- ---------------
* Estimated
ITEM 31. SALES TO SPECIAL PARTIES
The Company is concurrently, by means of this registration statement,
offering 60,000 Common Shares directly to trust managers, officers and employees
of the Company and directors, officers and employees of PMC Advisers or of the
affiliates of PMC Advisers and certain associated persons and entities, at a
price equal to $ per share less underwriting discounts and commissions
payable with respect to the Common Shares offered to the public. The obligation
of such direct investors to purchase Common Shares in the Direct Offering is
contingent on the purchase of Common Shares by the Underwriters. There is no
minimum number of Common Shares to be purchased in the Direct Offering. As a
condition to the purchase of Common Shares in the Direct Offering, such
investors shall agree not to resell any Common Shares purchased by them for at
least 180 days from the date of this registration statement without the consent
of Oppenheimer & Co., Inc.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On June 7, 1993, the Company issued 100 Common Shares of beneficial
interest to each of Lance B. Rosemore, President, Chief Executive Officer and
Trust Manager of the Company, and Andrew S. Rosemore, Chairman of the Board of
Trust Managers, Chief Operating Officer and Trust Manager of the Company, for an
aggregate price of $2,790 pursuant to an exemption from registration under the
Securities Act of 1933, as amended provided by Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder.
ITEM 33. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS
Section 9.20 of the Texas Real Estate Investment Trust Act (the "Texas REIT
Act"), subject to procedures and limitations stated therein, allows the Company
to indemnify any person who was, is or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a trust
manager or officer against judgments, penalties (including excise and similar
taxes), fines, settlements and reasonable expenses actually incurred by the
person in connection with the proceeding. The Company is required by Section
9.20 to indemnify a trust manager or officer against reasonable expenses
incurred by him
II-1
<PAGE> 81
in connection with a proceeding in which he is a named defendant or respondent
because he is or was a trust manager or officer if he has been wholly
successful, on the merits or otherwise, in the defense of the proceeding. Under
the Texas REIT Act, trust managers and officers are not entitled to
indemnification if (i) the trust manager or officer is found liable to the real
estate investment trust or is found liable for willful or intentional misconduct
in the performance of his duty to the real estate investment trust and (ii) the
trust manager or officer was found liable for willful or intentional misconduct
in the performance of his duty to the real estate investment trust. The statute
provides that indemnification pursuant to its provisions is not exclusive of the
rights of indemnification to which a person may be entitled under any provision
of the Declaration of Trust, bylaws, agreements, or otherwise. In addition, the
Company has, pursuant to Section 15.10 of the Texas REIT Act, provided in its
Declaration of Trust that, to the fullest extent permitted by applicable law, a
trust manager of the Company shall not be liable for any act, omission, loss,
damage, or expense arising from the performance of his duty under the real
estate investment trust, except for his own willful misfeasance, malfeasance or
negligence.
The Company's Declaration of Trust and Bylaws provide for indemnification
by the Company of its trust managers and officers to the fullest extent
permitted by the Texas REIT Act. In addition, the Company's Bylaws provide that
the Company may pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager or
officer made a party to a proceeding by reason of his status as a trust manager
or officer provided that (i) the trust managers have consented to the
advancement of expenses (which consent shall not be unreasonably withheld) and
(ii) the Company shall have received (a) a written affirmation by the trust
manager or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company under the Texas REIT Act
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met or it is ultimately determined that indemnification of
the trust manager against expenses incurred by him in connection with that
proceeding is prohibited by Section 9.20 of the Texas REIT Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
ITEM 34. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March
31, 1996
Consolidated Statements of Income for the period June 4, 1993 (date of
inception) to December 31, 1993, the years ended December 31, 1994 and
1995, and the three months ended March 31, 1995 and 1996
Consolidated Statements of Beneficiaries' Equity for the period June 4,
1993 (date of inception) to December 31, 1993, the years ended December
31, 1994 and 1995, and the three months ended March 31, 1996
Consolidated Statements of Cash Flows for the period June 4, 1993 (date
of inception) to December 31, 1993, the years ended December 31, 1994
and 1995, and the three months ended March 31, 1995 and 1996
Notes to Consolidated Financial Statements
II-2
<PAGE> 82
b. Schedules to Financial Statements
None.
c. Exhibits
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Declaration of Trust (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 3.1 and incorporated herein by reference)
3.1(a) -- Amendment No. 1 to Declaration of Trust (previously filed with the
Company's Amendment No. 1 on Form S-11 filed with the Securities and
Exchange Commission on September 30, 1993, as amended (Registration
No. 33-65010), as Exhibit No. 3.1(a) and incorporated herein by
reference)
3.1(b) -- Amendment No. 2 to Declaration of Trust (previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 as Exhibit No. 3.1(b) and incorporated herein by reference)
3.2 -- Bylaws (previously filed with the Company's Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on June
25, 1993, as amended (Registration No. 33-65010), as Exhibit No. 3.2
and incorporated herein by reference)
4. -- Form of Share Certificate.
5. -- Opinion of Winstead Sechrest & Minick P.C., regarding the legality of
the Common Shares
8. -- Opinion of Winstead Sechrest & Minick P.C., regarding tax matters
10.1 -- Investment Management Agreement between the Company and PMC Advisers,
Inc.
10.2 -- 1993 Employee Share Option Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.2 and incorporated herein by reference)
10.3 -- 1993 Trust Manager Share Option Plan (previously filed with the
Company's Registration Statement on Form S-11 filed with the
Securities and Exchange Commission on June 25, 1993, as amended
(Registration No. 33-65010), as Exhibit No. 10.3 and incorporated
herein by reference)
10.4 -- Dividend Reinvestment Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.4 and incorporated herein by reference)
10.5 -- Loan Origination Agreement (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65010), as Exhibit No. 10.5 and incorporated herein by reference)
10.6 -- Revolving Credit Facility (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.6 and incorporated herein by reference)
10.7 -- Structured Financing (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.7 and incorporated herein by reference)
</TABLE>
II-3
<PAGE> 83
<TABLE>
<C> <S>
10.8 -- Marketing/Reserve Agreement between U.S. Franchise Systems, Inc. and
the Company.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Winstead Sechrest & Minick P.C. Included in responses to
items 5 and 8.
24. -- Powers of attorney of the persons signing this registration
statement, Dr. Martha R. Greenberg and Dr. Ira Silver, are included
in Exhibit 24 of this registration statement (all other powers of
attorney were previously filed with the Company's Registration
Statement on Form S-11 filed with the Securities and Exchange
Commission on April 23, 1996 (Registration No. 333-2757), as Exhibit
No. 24 and incorporated herein by reference).
27. -- Financial Data Schedule
</TABLE>
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.
(c) Undertaking related to Rule 430A:
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> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Amendment No. 1 to Form S-11 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on June 7, 1996.
PMC COMMERCIAL TRUST
By: /s/ Lance B. Rosemore
------------------------------------
Lance B. Rosemore, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------------------
<C> <S> <C>
/s/ Dr. ANDREW S. ROSEMORE Chairman of the Board, Chief June 7, 1996
- --------------------------------------------- Operating Officer and
Dr. Andrew S. Rosemore Trust Manager
/s/ LANCE B. ROSEMORE President, Chief Executive June 7, 1996
- --------------------------------------------- Officer, Secretary and
Lance B. Rosemore Trust Manager (principal
executive officer)
/s/ BARRY N. BERLIN Chief Financial Officer June 7, 1996
- --------------------------------------------- (principal financial and
Barry N. Berlin accounting officer)
/s/ NATHAN G. COHEN* Trust Manager June 7, 1996
- ---------------------------------------------
Nathan G. Cohen
/s/ DR. MARTHA R. GREENBERG* Trust Manager June 7, 1996
- ---------------------------------------------
Dr. Martha R. Greenberg
/s/ ROY H. GREENBERG* Trust Manager June 7, 1996
- ---------------------------------------------
Roy H. Greenberg
/s/ IRVING MUNN* Trust Manager June 7, 1996
- ---------------------------------------------
Irving Munn
/s/ DR. IRA SILVER* Trust Manager June 7, 1996
- ---------------------------------------------
Dr. Ira Silver
*By: /s/ LANCE B. ROSEMORE
- ---------------------------------------------
Lance B. Rosemore
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 -- Underwriting Agreement
3.1 -- Declaration of Trust (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 3.1 and incorporated herein by reference)
3.1(a) -- Amendment No. 1 to Declaration of Trust (previously filed with the
Company's Amendment No. 1 on Form S-11 filed with the Securities and
Exchange Commission on September 30, 1993, as amended (Registration
No. 33-65010), as Exhibit No. 3.1(a) and incorporated herein by
reference)
3.1(b) -- Amendment No. 2 to Declaration of Trust (previously filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 as Exhibit No. 3.1(b) and incorporated herein by reference)
3.2 -- Bylaws (previously filed with the Company's Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on June
25, 1993, as amended (Registration No. 33-65910), as Exhibit No. 3.2
and incorporated herein by reference)
4. -- Form of Share Certificate
5. -- Opinion of Winstead Sechrest & Minick P.C., regarding the legality of
the Common Shares
8. -- Opinion of Winstead Sechrest & Minick P.C., regarding tax matters
10.1 -- Investment Management Agreement between the Company and PMC Advisers,
Inc.
10.2 -- 1993 Employee Share Option Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.2 and incorporated herein by reference)
10.3 -- 1993 Trust Manager Share Option Plan (previously filed with the
Company's Registration Statement on Form S-11 filed with the
Securities and Exchange Commission on June 25, 1993, as amended
(Registration No. 33-65910), as Exhibit No. 10.3 and incorporated
herein by reference)
10.4 -- Dividend Reinvestment Plan (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.4 and incorporated herein by reference)
10.5 -- Loan Origination Agreement (previously filed with the Company's
Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on June 25, 1993, as amended (Registration No.
33-65910), as Exhibit No. 10.5 and incorporated herein by reference)
10.6 -- Revolving Credit Facility (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.6 and incorporated herein by reference)
10.7 -- Structured Financing (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as Exhibit
No. 10.7 and incorporated herein by reference)
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.8 -- Marketing/Reserve Agreement between U.S. Franchise Systems, Inc. and
the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Winstead Sechrest & Minick P.C. Included in responses to
items 5 and 8
24. -- Powers of attorney of the persons signing this registration
statement, Dr. Martha R. Greenberg and Dr. Ira Silver, are included
in Exhibit 24 to this registration statement. (All other powers of
attorney were previously filed with the Company's Registration
Statement on Form S-11 filed with the Securities and Exchange
Commission on April 23, 1996 (Registration No. 333-2757, as Exhibit
No. 24 incorporated herein by reference.)
27. -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
PMC COMMERCIAL TRUST
Shares of Beneficial Interest
UNDERWRITING AGREEMENT
________ __, 1996
OPPENHEIMER & CO., INC.
J.C. BRADFORD & CO.
FAHNESTOCK & CO., INC.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
PMC Commercial Trust, a Texas real estate investment trust
(the "Company"), proposes to sell to you and the other underwriters named on
Schedule I to this Agreement (the "Underwriters"), for whom you are acting as
Representatives, an aggregate of 2,000,000 shares (the "Firm Shares") of its
common shares of beneficial interest, $0.01 par value (the "Common Shares").
In addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 300,000 Common Shares (the "Option Shares") from
it for the purpose of covering over-allotments in connection with the sale of
the Firm Shares. The Firm Shares and the Option Shares are together called the
"Shares."
1. Sale and Purchase of the Shares. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at $_____ per share (the
"Initial Price"), the number of Firm Shares set forth opposite the
name of such Underwriter on Schedule I to this Agreement.
<PAGE> 2
2
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of the
Option Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted
by the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only
to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on
or before 12:00 noon, New York City time, on the business day before
the Firm Shares Closing Date (as defined below), and from time to time
thereafter within 30 days after the date of this Agreement, in each
case upon written or telegraphic notice, or verbal or telephonic
notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City
time, on the business day before the Firm Shares Closing Date or at
least two business days before each Option Shares Closing Date (as
defined below), as the case may be, setting forth the number of Option
Shares to be purchased and the time and date (if other than the Firm
Shares Closing Date) of such purchase.
Furthermore, on the Firm Shares Closing Date (as hereinafter defined), the
Company proposes to issue and sell directly to certain officers and trust
managers of the Company up to 60,000 additional Common Shares pursuant to
agreements (the "Purchase Agreements"), dated as of ___________, 1996, between
the Company and each such party (each a "Direct Purchaser"). The Common Shares
to be purchased by all Direct Purchasers on the Firm Shares Closing Date
pursuant to the Purchase Agreements are hereinafter called the "Company
Directed Shares" and are not "Shares" within the meaning of this Agreement.
2. Delivery and Payment. Delivery by the Company of the
Firm Shares to the Representatives for the respective accounts of the
Underwriters, and payment of the purchase price by certified or official bank
check or checks payable in New York Clearing House (next day) funds to the
Company shall take place at the offices of Oppenheimer & Co., Inc., at
Oppenheimer Tower, World Financial Center, New York, New York 10281, at 10:00
a.m., New York City time, on the third or fourth business day (as permitted
under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) following the date of this Agreement, or at such time on such
other date, not later than 10 business days after the date of this Agreement,
as shall be agreed upon by the Company and the Representatives (such time and
date of delivery and payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the Representatives
for the respective accounts of the Underwriters and payment of the purchase
price by certified or official bank check or checks payable in New York
Clearing House (next day) funds to the Company, for the purchase price of the
Option Shares being sold by the Company, shall take place at the offices of
Oppenheimer & Co., Inc. specified above at the time and on the date (which may
be the same date as, but in no event shall be earlier than, the Firm Shares
Closing Date) specified in the notice referred to in Section l(b) (such time
and date of delivery and payment
<PAGE> 3
3
are called an "Option Shares Closing Date"). The Firm Shares Closing Date and
each Option Shares Closing Date are called, individually, a "Closing Date" and,
together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request
at least two full business days before the Firm Shares Closing Date or, in the
case of Option Shares, on the day of notice of exercise of the option as
described in Section l(b) and shall be made available to the Representatives
for checking and packaging, at such place as is designated by the
Representatives, on the full business day before the Firm Shares Closing Date
(or the Option Shares Closing Date in the case of the Option Shares).
3. Registration Statement and Prospectus, Public
Offering. The Company has prepared in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-11
(No. 333-_______), including a preliminary prospectus relating to the Shares
and the Company Directed Shares, and has filed with the Commission the
Registration Statement (as hereinafter defined) and such amendments thereof as
may have been required to the date of this Agreement. Copies of such
Registration Statement (including all amendments thereof) and of the related
preliminary prospectus have heretofore been delivered by the Company to you.
The term "preliminary prospectus" means any preliminary prospectus (as
described in Rule 430 of the Rules) included at any time as a part of the
Registration Statement. The Registration Statement as amended at the time and
on the date it becomes effective (the "Effective Date"), including all exhibits
and information, if any, deemed to be part of the Registration Statement
pursuant to Rule 424(b) and Rule 430A of the Rules, is called the "Registration
Statement." The term "Prospectus" means the prospectus in the form first used
to confirm sales of the Shares (whether such prospectus was included in the
Registration Statement at the time of effectiveness or was subsequently filed
with the Commission pursuant to Rule 424(b) of the Rules).
The Company understands that the Underwriters propose to make
a public offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date and the date of this Agreement as
the Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. Representations and Warranties of the Company. The
Company hereby represents and warrants to each Underwriter as follows:
(a) The Company meets the requirements for use of Form
S-11 under the Securities Act. On the Effective Date the Registration
Statement complied, and on the date of the Prospectus, on the date any
post-effective amendment to the Registration Statement shall become
effective, on the date any supplement or amendment to the
<PAGE> 4
4
Prospectus is filed with the Commission and on each Closing Date, the
Registration Statement and the Prospectus (and any amendment thereof
or supplement thereto) will comply, in all material respects, with the
applicable provisions of the Securities Act and the Rules and the
Exchange Act and the rules and regulations of the Commission
thereunder; the Registration Statement did not, as of the Effective
Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and on the other dates
referred to above neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. When any related
preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment thereto
or pursuant to Rule 424(a) of the Rules) and when any amendment
thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus as amended or supplemented complied in all
material respects with the applicable provisions of the Securities Act
and the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
Notwithstanding the foregoing, the Company makes no representation or
warranty as to the paragraph with respect to stabilization on the
inside front cover page of the Prospectus and the statements contained
under the caption "Underwriting" in the Prospectus. The Company
acknowledges that the statements referred to in the previous sentence
constitute the only information furnished in writing by the
Representatives on behalf of the several Underwriters specifically for
inclusion in the Registration Statement, any preliminary prospectus or
the Prospectus.
(b) The financial statements of the Company (including
all notes and schedules thereto) included in the Registration
Statement and Prospectus comply with the requirements of the
Securities Act and present fairly the financial position and the other
information purported to be shown therein of the Company at the
respective dates to which they apply; such financial statements and
related schedules and notes have been prepared in conformity with
generally accepted accounting principles consistently applied and all
adjustments necessary for a fair presentation of the results at such
dates have been made; and the other financial and statistical
information and data set forth in the Registration Statement and
Prospectus are accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the
Company.
(c) Coopers & Lybrand, whose report is filed with the
Commission as a part of the Registration Statement are, and during the
periods covered by their report were, independent public accountants
as required by the Securities Act and the Rules.
(d) The Company is a real estate investment trust duly
organized, validly existing and in good standing under the laws of the
State of Texas. The Company is qualified as a real estate investment
trust under the Texas Real Estate Investment
<PAGE> 5
5
Trust Act and the rules and regulations thereunder, and the Company's
method of operation as described in the Registration Statement and
Prospectus will enable it to continue to meet the requirements for
qualification as a real estate investment trust under such act.
Except as described in the Prospectus, the Company does not own,
directly or indirectly, any interest in, or control, directly or
indirectly, any corporation, partnership, joint venture, association
or other business organization. The Company is duly qualified and in
good standing as a foreign corporation in each jurisdiction in which
the character or location of its assets or properties (owned, leased
or licensed) or the nature of its business makes such qualification
necessary except for such jurisdictions where the failure to so
qualify would not have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company.
(e) The Company does not own, lease or license any asset
or property or conduct any business outside the United States of
America. The Company has all requisite power and authority, and the
Company and its officers, trust managers and employees have all
necessary authorizations, approvals, consents, orders, licenses,
certificates and permits of and from all governmental or regulatory
bodies or any other person or entity, domestic or foreign ("Permits"),
to own, lease and license their assets and properties and conduct
their businesses as now being conducted and as described in the
Registration Statement and the Prospectus except for such Permits the
failure to so obtain would not, individually or in the aggregate, have
a material adverse effect upon the assets or properties, business,
results of operations, prospects or condition (financial or otherwise)
of the Company; no such Permit contains a materially burdensome
restriction other than as disclosed in the Registration Statement and
the Prospectus; the Company and each of its officers, trust managers
and employees has fulfilled and performed in all material respects its
obligations with respect to such Permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation
or termination thereof or any other material impairment of the rights
of the holder of any such Permit; and the Company has all such power
and authority, and such authorizations, approvals, consents, orders,
licenses, certificates and Permits to enter into, deliver and perform
this Agreement and the Investment Management Agreement, dated as of
December 16, 1993, between PMC Advisers, Inc. ("PMC Advisers") and the
Company, including the Loan Origination Agreement attached as Exhibit
A thereto (collectively, the "Management Agreement") and to issue and
sell the Shares (except as may be required under state securities and
Blue Sky laws) and the Company Directed Shares.
(f) The Company owns or possesses adequate and
enforceable rights to use all patents, patent applications,
trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how and other
similar rights and proprietary knowledge (collectively, "Intangibles")
necessary for the conduct of its business as described in the
Registration Statement and the Prospectus. The Company has not
received any notice of, and to its best knowledge is not aware of, any
infringement of or conflict with asserted rights of others with
respect to any Intangibles which, singly or in the aggregate, if the
subject of an unfavorable decision,
<PAGE> 6
6
ruling or finding, would have a material adverse effect upon the
assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company.
(g) The Company has good title to each of the items of
property (real and personal) which are reflected in the financial
statements referred to in Section 4(b) or are referred to in the
Registration Statement and the Prospectus as being owned by it and
valid and enforceable leasehold interests in each of the items of real
and personal property which are referred to in the Registration
Statement and the Prospectus as being leased by it, in each case free
and clear of all liens, encumbrances, claims, security interests and
defects, other than those described in the Registration Statement and
the Prospectus and those which do not and will not have a material
adverse effect upon the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the
Company.
(h) There is no litigation or governmental or other
proceeding or investigation before any court or before or by any
public body or board pending or, to the Company's best knowledge,
threatened (and the Company does not know of any basis therefor)
against, or involving the assets, properties or business of, the
Company or any of its officers, trust managers or five percent
shareholders which would materially adversely affect the value or the
operation of any such assets or properties or the business, results of
operations, prospects or condition (financial or otherwise) of the
Company.
(i) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as described therein, (i) there has not been any material
adverse change, or any development involving or which could reasonably
be expected to involve a prospective material adverse change, in the
assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company, whether or not
arising from transactions in the ordinary course of business; (ii)
there has not been any material change in the capital stock, or
material increase in the short-term or long-term debt, of the Company;
(iii) the Company has not sustained any material loss or interference
with its assets, businesses or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree; and (iv)
since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, except as reflected
therein, the Company has not (a) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money,
except such liabilities or obligations incurred in the ordinary course
of business, (b) entered into any transaction not in the ordinary
course of business or (c) declared or paid any dividend or made any
distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its stock.
<PAGE> 7
7
(j) There is no document or contract of a character
required to be described in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. Each material agreement to which
the Company is a party is in full force and effect and is valid and
enforceable by and against the Company in accordance with its terms,
assuming the due authorization, execution and delivery thereof by each
of the other parties thereto. Neither the Company nor, to the best of
the Company's knowledge, any other party is in default in the
observance or performance of any term or obligation to be performed by
it under any such agreement, and no event has occurred which with
notice or lapse of time or both would constitute such a default, in
any such case which default or event would have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
(k) The Company is operating in compliance with (and has
not violated) all federal, state and local laws, regulations,
administrative orders or rulings or court decrees applicable to it or
to any of its property, (including without limitation those relating
to environmental, safety and similar matters, discrimination in the
hiring, promotion and pay of employees, the Employee Retirement Income
Security Act and the rules and regulations thereunder), except for
violations which would not, individually or in the aggregate, have a
material adverse effect on the assets or properties, business, results
of operations, prospects or condition (financial or otherwise) of the
Company. The Company is not in violation of any term or provision of
its declaration of trust or by-laws, and the Company has not taken any
actions which may result in the inability of the Company to qualify as
a real estate investment trust under the Texas Real Estate Investment
Trust Act.
(l) Neither the execution, delivery and performance of
this Agreement or the Management Agreement by the Company nor the
consummation of any of the transactions contemplated hereby
(including, without limitation, the issuance and sale by the Company
of the Shares and the Company Directed Shares) or thereby will give
rise to a right to terminate or accelerate the due date of any payment
due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of
the Company pursuant to the terms of, any indenture, mortgage, deed of
trust or other agreement or instrument to which the Company is a party
or by which it or any of its properties or businesses is bound, or any
franchise, license, Permit, judgment, decree, order, statute, rule or
regulation applicable to the Company or violate any provision of the
declaration of trust or by-laws of the Company, except for such
consents or waivers which have already been obtained and are in full
force and effect, or require any consent, approval, authorization or
other order of or registration or filing with, any court, regulatory
body, administrative agency or other governmental body, agency or
official (except compliance with the Securities Act, the Exchange Act
and the securities or Blue Sky laws of various jurisdictions, which
has been or will be effected in accordance with this Agreement).
<PAGE> 8
8
(m) The Company has authorized and outstanding shares of
beneficial interest as set forth under the caption "Capitalization" in
the Prospectus. All of the outstanding Common Shares have been duly
and validly issued and are fully paid and nonassessable and were
issued and sold in compliance with all applicable federal and state
securities laws, and none of them were issued in violation of any
preemptive or other similar right. The Shares, when issued and sold
pursuant to this Agreement, and the Company Directed Shares, when
issued and sold pursuant to the Purchase Agreements, will be duly and
validly issued, fully paid and nonassessable and none of them will be
issued in violation of any preemptive or other similar right. Except
as disclosed in the Registration Statement and the Prospectus, there
is no outstanding option, warrant or other right calling for the
issuance of, and there is no commitment, plan or arrangement to issue,
any shares of the Company or any security convertible into, or
exercisable or exchangeable for, such shares. The Common Shares, the
Company's Preferred Shares and the Shares conform in all material
respects to all statements in relation thereto contained in the
Registration Statement and the Prospectus.
(n) No holder of any shares of beneficial interest of the
Company has the right to have any security owned by such holder
included in the Registration Statement or to demand registration of
any security owned by such holder. Each trust manager and officer of
the Company has delivered to the Representatives his enforceable
written agreement that he will not, for a period of 180 days after the
date of the Prospectus, offer for sale, sell, distribute, grant any
option for the sale of, or otherwise dispose of, directly or
indirectly, any Common Shares (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common Shares)
owned by him, without the prior written consent of Oppenheimer & Co.,
Inc.
(o) All necessary action has been duly and validly taken
by the Company to authorize the execution, delivery and performance of
this Agreement and the issuance and sale of the Shares and the Company
Directed Shares by the Company. Each of this Agreement, the
Management Agreement and the Purchase Agreements has been duly and
validly authorized, executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except
(i) as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and by general
equitable principles and (ii) to the extent that rights to indemnity
or contribution under this Agreement may be limited by Federal and
state securities laws or the public policy underlying such laws.
(p) The Company is not involved in any labor dispute nor,
to the knowledge of the Company, is any such dispute threatened, which
dispute would have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company.
<PAGE> 9
9
(q) No transaction has occurred between or among the
Company and any of its affiliates or any of its officers, trust
managers or five percent shareholders or any affiliate or affiliates
of any such officer, trust manager or five percent shareholder that is
required to be described in and is not described in the Registration
Statement and the Prospectus.
(r) Neither the Company nor, to the best knowledge of the
Company, any affiliate of the Company or any other person acting on
its or their behalf has directly or indirectly (i) used any of its
funds for any unlawful payment to any foreign or domestic governmental
or judicial officials or employees, (ii) made any unlawful payment
(including any bribe, rebate, payoff, kickback or influence payment)
to any person or entity, private or public, whether in the form of
cash, property, services or otherwise, (iii) violated or is in
violation of any provision of federal or state laws relating to
corruption of governmental officials or representatives, including the
Foreign Corrupt Practices Act of 1977 and similar laws, (iv)
established or maintained any fund of monies or other assets for the
purposes specified in clauses (i) or (ii) above or (v) made any false
or fictitious entry on the books or records of the Company relating to
any payment referred to in clauses (i) or (ii) above.
(s) The Company has not taken, nor will it take, directly
or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Shares to facilitate the sale
or resale of any of the Shares.
(t) The Company has filed all Federal, state and local
tax returns which are required to be filed through the date hereof, or
has received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by them to the extent that the
same are material and have become due.
(u) The Company is not and, upon sale of the Shares to be
issued and sold thereby in accordance herewith and the sale of the
Company Directed Shares pursuant to the Purchase Agreements and the
application of the net proceeds to the Company of such sales as
described in the Prospectus under the caption "Use of Proceeds," will
not be an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(v) The Shares and the Company Directed Shares have been
approved for listing on the American Stock Exchange, and a
registration statement has been filed on Form 8-A pursuant to Section
12 of the Exchange Act for the Shares and the Company Directed Shares,
which registration statement complies in all material respects with
the Exchange Act.
(w) The Company has complied with all of the requirements
and filed the required forms as specified in Florida Statutes Section
517.075.
<PAGE> 10
10
(x) The Company has complied and intends to continue to
comply with the requirements of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the
Company is qualified as a real estate investment trust under the Code.
The method of operation of the Company's business as described in the
Registration Statement and the Prospectus is in conformity with the
requirements for qualification as a real estate investment trust under
the Code.
5. Representations and Warranties of PMC Advisers. PMC
Advisers makes the same representations and warranties as the Company set forth
under Sections 4(a) above, and further represents to, warrants to and agrees
with each of the several Underwriters that:
(a) PMC Advisers has been duly organized, is validly
existing and is in good standing as a corporation under the laws of
the State of Texas, with full power and authority to own or lease its
properties and conduct its business as described in the Prospectus and
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which such qualification is
required (except where the failure so to qualify would not have a
material adverse effect on the ability of PMC Advisers to conduct its
business with respect to the Company as described in the Prospectus),
and has all power and authority necessary to perform its advisory
services with respect to the Company as described in the Prospectus.
(b) PMC Advisers is duly registered and in good standing
with the Commission under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and all applicable state laws, as an
investment adviser. PMC Advisers is not prohibited by the Advisers
Act, or the rules and regulations under such Act, or applicable state
law, from acting for the Company under the Management Agreement as
contemplated by the Prospectus.
(c) The description of each of PMC Advisers and PMC
Capital, Inc., the sole shareholder of PMC Advisers ("PMC Capital"),
in the Prospectus is true and correct and does not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they
were made.
(d) This Agreement and the Management Agreement have each
been duly authorized, executed and delivered by PMC Advisers and each
constitutes the valid and binding obligation of PMC Advisers and is
enforceable against PMC Advisers in accordance with its terms. No
consent, approval, authorization or order of, or filing with, any
court or governmental agency or body or financial institution is
required for the execution, delivery and performance of this Agreement
or the Management Agreement by PMC Advisers or the consummation by PMC
Advisers of the transactions contemplated hereby or thereby, except
such as have been obtained under the Securities Act, the Exchange Act,
the Advisers Act or applicable state securities laws in connection
with the purchase and distribution of the Shares by the Underwriters.
<PAGE> 11
11
(e) Neither the execution, delivery and performance of
this Agreement or the Management Agreement by PMC Advisers nor the
consummation of any of the transactions contemplated hereby or thereby
(including, without limitation, the issuance and sale by the Company
of the Shares and the Company Directed Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of
PMC Advisers pursuant to the terms of, any indenture, mortgage, deed
of trust or other agreement or instrument to which PMC Advisers is a
party or by which it or any of its properties or businesses is bound,
or any franchise, license, Permit, judgment, decree, order, statute,
rule or regulation applicable to PMC Advisers or violate any provision
of the articles of incorporation or by-laws of PMC Advisers, except
for such consents or waivers which have already been obtained and are
in full force and effect.
(f) Except as described in the Registration Statement and
the Prospectus, there is no litigation or governmental proceeding to
which PMC Advisers or PMC Capital is a party or to which any property
of PMC Advisers or PMC Capital is subject or which is pending or, to
the knowledge of PMC Advisers, contemplated against PMC Advisers or
PMC Capital which might result in any material adverse change in the
condition (financial or other), results of operations, business or
prospects of PMC Advisers or which is required to be disclosed in the
Registration Statement and the Prospectus.
(g) Except as described in or contemplated by the
Registration Statement and the Prospectus, (A) there has not been any
material adverse change in, or adverse development which materially
affects, the condition (financial or other), results of operation,
business or prospects, of PMC Advisers as of the date of the
Prospectus and (B) there have been no transactions entered into by PMC
Advisers that are material to PMC Advisers other than those in the
ordinary course of business.
(h) All financial and statistical information data set
forth in the Registration Statement and Prospectus relating to PMC
Capital are accurately presented and prepared on a basis consistent
with the books and records of PMC Capital.
(i) Neither PMC Advisers nor PMC Capital has taken,
directly or indirectly, any action designed to or that might
reasonably by expected to cause or result in stabilization or
manipulation of the price of the Common Shares to facilitate the sale
or resale of the Shares.
(j) PMC Capital has received an Exemptive Order pursuant
to Section 6(c) of the Investment Company Act of 1940 which exempts
PMC Capital from the provisions of Section 12(d)(3) of such Act and
permits PMC Capital to establish PMC Advisers as a registered adviser
under the Advisers Act and pursuant to Section 17(d) of the Investment
Company Act of 1940 and Rule 17d-1 thereunder which permits
<PAGE> 12
12
PMC Advisers to provide advisory services to the Company (the
"Exemptive Order"). The Exemptive Order is in full force and effect,
and no proceeding to withdraw the Exemptive Order has been instituted
or, to the knowledge of PMC Advisers, is threatened. PMC Capital and
PMC Advisers are in compliance with the terms of the Exemptive Order.
6. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters under this Agreement are several and not
joint. The respective obligations of the Underwriters to purchase the Shares
are subject to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 7(A)(a) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be
in effect and no order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission, and
any requests for additional information on the part of the Commission
(to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Representatives.
(c) Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development
involving a prospective change, in or affecting the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, PMC Advisers or PMC Capital
not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially
adversely affect the market for the Shares, or (ii) any event or
development relating to or involving the Company, PMC Advisers or PMC
Capital, any officer or trust manager of the Company or officer or
director of PMC Advisers or PMC Capital, which makes any statement
made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to
state a material fact required by the Securities Act or any other law
to be stated therein or necessary in order to make the statements
therein not misleading, if amending or supplementing the Prospectus to
reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, adversely affect the
market for the Shares.
(d) The representations and warranties of the Company and
PMC Advisers contained in this Agreement and in the certificates
delivered pursuant to Section 6(e) shall be true and correct when made
and on and as of each Closing Date as if made on such date and the
Company shall have performed all covenants and agreements and
satisfied all the conditions contained in this Agreement required to
be performed or satisfied by it at or before such Closing Date.
<PAGE> 13
13
(e) The Representatives shall have received on each
Closing Date (i) a certificate, addressed to the Representatives and
dated such Closing Date, of the chief executive officer and the chief
financial officer or chief accounting officer of the Company to the
effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus and this Agreement and that
the representations and warranties of the Company in this Agreement
are true and correct on and as of such Closing Date with the same
effect as if made on such Closing Date and the Company has performed
all covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior
to such Closing Date, and (ii) a certificate, addressed to the
Representatives and dated such Closing Date, of the chief executive
officer and the chief financial or chief accounting officer of PMC
Advisers to the effect that the representations and warranties of PMC
Advisers in this Agreement are true and correct on and as of such
Closing Date with the same effect as if made on such Closing Date and
PMC Advisers has performed all covenants and agreements and satisfied
all conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date.
(f) The Representatives shall have received at the time
this Agreement is executed and on each Closing Date a signed letter
from Coopers & Lybrand, addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing Date,
in form and substance reasonably satisfactory to the Representatives,
confirming that they are independent accountants within the meaning of
the Securities Act and the Rules, that the response to Item 28 of the
Registration Statement is correct insofar as it relates to them and
stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules included in the
Registration Statement and the Prospectus and reported on by
them and the unaudited financial statements for the period
ended March 31, 1996 included in the Registration Statement
and the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Securities
Act and the Rules, and were prepared on a consistent basis;
(ii) On the basis of a reading of the amounts
included in the Registration Statement and the Prospectus
under the headings "Summary Financial and Operating
Information" and "Selected Financial Data," carrying out
certain procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter, a reading of the minutes of
the meetings of the shareholders and trust managers of the
Company, and inquiries of certain officials of the Company who
have responsibility for financial and accounting matters of
the Company as to transactions and events subsequent to the
date of the latest audited financial statements, except as
disclosed in the Registration Statement and the Prospectus,
nothing came to their attention which caused them to believe
that:
<PAGE> 14
14
(A) the amounts shown in "Summary Financial and Operating Data" and
"Selected Financial Data" included in the Registration Statement and
the Prospectus do not agree with the corresponding amounts in the
audited financial statements from which such amounts were derived; or
(B) with respect to the period subsequent to March 31, 1996, there
were, at a specified date not more than five business days prior to
the date of the letter, any increases in the current liabilities and
long-term liabilities of the Company or any decreases in total assets
or the shareholders' equity of the Company, as compared with the
amounts shown on the Company's unaudited balance sheet at March 31,
1996 included in the Registration Statement, except for changes set
forth in such letter, in which case the letter shall be accompanied by
an explanation by the Company to the significance thereof unless said
explanation is not deemed necessary by the Representatives; and
(iii) they have performed certain other procedures
as a result of which they determined that certain information
of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information
derived from the general accounting records of the Company)
set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with the
accounting records of the Company.
References to the Registration Statement and the Prospectus in
this paragraph (f) are to such documents as amended and supplemented
at the date of the letter.
(g) The Representatives shall have received on each
Closing Date from Winstead, Sechrest & Minick P.C., counsel for the
Company, an opinion, addressed to the Representatives and dated such
Closing Date, and stating in effect that:
(i) The Company is a real estate investment trust
duly organized, validly existing and in good standing under
the laws of the State of Texas. The Company is qualified as a
real estate investment trust under the Texas Real Estate
Investment Trust Act and the rules and regulations thereunder,
and the Company's method of operation as described in the
Registration Statement and Prospectus will enable it to
continue to meet the requirements for qualification as a real
estate investment trust under such act. The Company is duly
qualified and in good standing in each jurisdiction in which
the character or location of its assets or properties (owned,
leased or licensed) or the nature of its businesses makes such
qualification necessary, except for such jurisdictions where
the failure to so qualify would not have a material adverse
effect on the assets or properties, business, results of
operations, prospects or conditions (financial or otherwise)
of the Company. To the best of such counsel's knowledge,
except as described in the Prospectus, the Company does not
own, directly or indirectly, any interest in, or control,
directly or indirectly, any corporation, partnership, joint
venture, association or other business organization.
<PAGE> 15
15
(ii) The Company has all requisite power and
authority to own, lease and license its assets and properties
and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus;
and the Company has all requisite power and authority and all
necessary authorizations, approvals, consents, orders,
licenses, certificates and Permits to enter into, deliver and
perform this Agreement and the Management Agreement and to
issue and sell the Shares and the Company Directed Shares
(other than those required under state securities and Blue Sky
laws, as to which such counsel need express no opinion).
(iii) The Company has authorized and issued shares
of beneficial interest as set forth in the Registration
Statement and the Prospectus; the certificates evidencing the
Shares conform to the requirements of the Texas Real Estate
Investment Trust Act and have been duly authorized for
issuance by the Company; all of the outstanding Common Shares
of the Company have been duly and validly authorized and have
been duly and validly issued and are fully paid and
nonassessable and none of them was issued in violation of any
preemptive or other similar right. The Shares, when issued
and sold pursuant to this Agreement, and the Company Directed
Shares, when issued and sold pursuant to the Purchase
Agreements, will be duly and validly issued, outstanding,
fully paid and, except as disclosed in the Prospectus,
nonassessable and none of them will have been issued in
violation of any preemptive or other similar right. To the
best of such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there is no
outstanding option, warrant or other right calling for the
issuance of, and no commitment, plan or arrangement to issue,
any shares of beneficial interest of the Company or any
security convertible into, exercisable for, or exchangeable
for shares of beneficial interest of the Company. Except as
described in the Registration Statement and the Prospectus,
such counsel does not know of any holder of any securities of
the Company or any other person who has the right, contractual
or otherwise, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of
the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration
Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the
Securities Act of any Common Shares or other securities of the
Company. The authorized shares of beneficial interest
(including the Shares) conform in all material respects to the
descriptions thereof contained in the Registration Statement
and the Prospectus.
(iv) The agreement of the Company's trust managers
and officers stating that for a period of 180 days from the
date of the Prospectus they will not, without the prior
written consent of Oppenheimer & Co., Inc., offer for sale,
sell, distribute, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any Common
Shares (or any securities convertible into, exercisable for,
or exchangeable for any Common Shares) owned by them has been
duly and validly delivered by such persons and constitutes the
legal,
<PAGE> 16
16
valid and binding obligation of each such person enforceable
against each such person in accordance with its terms, except
as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(v) All necessary action has been duly and
validly taken by the Company to authorize the execution,
delivery and performance of this Agreement, the Management
Agreement and the issuance and sale of the Shares and the
Company Directed Shares. Each of this Agreement and the
Management Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes the
legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except (A)
as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (B) to the
extent that rights to indemnity or contribution under this
Agreement may be limited by Federal or state securities laws
or the public policy underlying such laws.
(vi) Neither the execution, delivery and
performance of this Agreement or the Management Agreement by
the Company (including, without limitation, the issuance and
sale by the Company of the Shares and the Company Directed
Shares) will give rise to a right to terminate or accelerate
the due date of any payment due under, or conflict with or
result in the breach of any term or provision of, or
constitute a default (or any event which with notice or lapse
of time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any
properties or assets of the Company pursuant to the terms of
any indenture, mortgage, deed of trust, note or other
agreement or instrument of which such counsel is aware and to
which the Company is a party or by which the Company or any of
its properties or businesses is bound, or any franchise,
license, Permit, judgment, decree, order, statute, rule or
regulation applicable to the Company or violate any provision
of the declaration of trust or by-laws of the Company.
(vii) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any term, covenant or condition
by the Company of any indenture, mortgage, deed of trust, note
or any other agreement or instrument to which the Company is a
party or by which it or any of its assets or properties or
businesses may be bound or affected, where the consequences of
such default would have a material and adverse effect on the
assets, properties, business, results of operations, prospects
or condition (financial or otherwise) of the Company.
<PAGE> 17
17
(viii) To the best of such counsel's knowledge, the
Company is not in violation of any term or provision of its
declaration of trust or by-laws and is not in violation of any
term or provision of any Permit, judgment, decree, order,
statute, rule or regulation, where the consequences of such
violation would have a material and adverse effect on the
assets or properties, businesses, results of operations,
prospects or condition (financial or otherwise) of the
Company.
(ix) No consent, approval, authorization or order
of any court or governmental or regulatory agency or body is
required for the performance of this Agreement or the
Management Agreement by the Company or the consummation of the
transactions contemplated hereby or thereby, except such as
have been obtained under the Securities Act and the Rules or
the Exchange Act and such as may be required under state
securities or Blue Sky laws (as to which such counsel need not
express any opinion) in connection with the purchase and
distribution of the Shares by the several Underwriters.
(x) To the best of such counsel's knowledge,
there is no litigation or governmental or other proceeding or
investigation, before any court or before or by any public
body or board, pending or threatened against, or involving the
assets, properties or businesses of, the Company or any of its
officers, trust managers or five percent shareholders which if
adversely determined could have a material adverse effect upon
the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the
Company.
(xi) The descriptions in the Registration
Statement and Prospectus of statutes, legal and governmental
proceedings, contracts and other documents are accurate and
fairly present the information required to be shown; and such
counsel do not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus that
are not described as required, or of any contracts or
documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not described
and filed as required.
(xii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or
supplement thereto (except for the financial statements and
schedules and other financial and statistical data included
therein, as to which such counsel expresses no opinion) comply
as to form in all material respects with the requirements of
the Securities Act and the Rules.
(xiii) The Registration Statement has become
effective under the Securities Act, the Prospectus has been
filed as required by Section 6(a) hereof, and to the knowledge
of such counsel no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceeding
for that purpose has been instituted or threatened, pending or
contemplated.
<PAGE> 18
18
(xiv) The Shares and the Company Directed Shares
have been approved for listing on the American Stock Exchange
and a registration statement has been filed pursuant to
Section 12 of the Exchange Act and has been declared
effective.
(xv) The Company is not, and upon sale of the
Shares and the Company Directed Shares and the application of
the net proceeds therefrom as described in the Prospectus
under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(xvi) The information in the Registration Statement
and Prospectus under the caption "Federal Income Tax
Considerations" has been reviewed by such counsel and is
accurate in all material respects and does not omit to state
any material matter of law relating to the taxation of the
Company and its shareholders.
(xvii) The Company is qualified as a real estate
investment trust under the Code and the rules and regulations
thereunder, and the Company's method of operation as described
in the Registration Statement and Prospectus will enable it to
continue to meet the requirements for taxation as a real
estate investment trust under the Code and the rules and
regulations thereunder.
To the extent deemed advisable by such counsel, they may rely
as to matters of fact on certificates of responsible officers of the Company
and public officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws
of the State of Texas and the Federal laws of the United States; provided that
such counsel shall state that in their opinion the Underwriters and they are
justified in relying on such other opinions. Copies of such certificates and
other opinions shall be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except
as specified in the foregoing opinion), on the basis of the foregoing, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective (except with
respect to the financial statements and
<PAGE> 19
19
notes and schedules thereto and other financial data, as to which such counsel
need express no belief or opinion) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
as amended or supplemented (except with respect to the financial statements and
notes and schedules thereto and other financial data, as to which such counsel
need make no statement) as of its date and as of the Firm Shares Closing Date
or the Option Shares Closing Date contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(h) The Representatives shall have received on each
Closing Date from Winstead, Sechrest & Minick P.C., counsel for PMC
Advisers, an opinion, addressed to the Representatives and dated such
Closing Date, and stating in effect that:
(i) PMC Advisers has been duly organized, is
validly existing as a corporation and is in good standing
under the laws of the State of Texas. PMC Advisers is duly
qualified and in good standing in each jurisdiction in which
the character or location of its assets or properties (owned,
leased or licensed) or the nature of its businesses makes such
qualification necessary, except for such jurisdictions where
the failure to so qualify would not have a material adverse
effect on the assets or properties, business, results of
operations, prospects or conditions (financial or otherwise)
of PMC Advisers. To the best of such counsel's knowledge, PMC
Advisers does not own, directly or indirectly, any interest
in, or control, directly or indirectly, any corporation,
partnership, joint venture, association or other business
organization.
(ii) PMC Advisers has all requisite power and
authority to own, lease and license its assets and properties
and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus;
and PMC Advisers has all requisite power and authority and all
necessary authorizations, approvals, consents, orders,
licenses, certificates and Permits to enter into, deliver and
perform this Agreement and the Management Agreement.
(iii) All necessary action has been duly and
validly taken by PMC Advisers to authorize the execution,
delivery and performance of this Agreement and the Management
Agreement. Each of this Agreement and the Management
Agreement has been duly and validly authorized, executed and
delivered by PMC Advisers and constitutes the legal, valid and
binding obligation of PMC Advisers enforceable against PMC
Advisers in accordance with its terms, except (A) as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and
by general equitable principles and (B) to the extent that
rights to indemnity or contribution under this Agreement may
be limited by Federal or state securities laws or the public
policy underlying such laws.
(iv) Neither the execution, delivery and
performance of this Agreement or the Management Agreement by
PMC Advisers will give rise to a right to terminate or
accelerate the due date of any payment due under, or
<PAGE> 20
20
conflict with or result in the breach of any term or provision
of, or constitute a default (or any event which with notice or
lapse of time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any
properties or assets of PMC Advisers pursuant to the terms of
any indenture, mortgage, deed of trust, note or other
agreement or instrument of which such counsel is aware and to
which PMC Advisers is a party or by which PMC Advisers or any
of its properties or businesses is bound, or any franchise,
license, Permit, judgment, decree, order, statute, rule or
regulation applicable to PMC Advisers or violate any provision
of the articles of incorporation or by-laws of PMC Advisers.
(v) PMC Advisers is duly registered with the
Commission under the Advisers Act as an investment adviser and
is not prohibited by the Advisers Act, or the rules and
regulations thereunder, from acting as an investment adviser
for the Company under the Management Agreement as contemplated
by the Prospectus. The Management Agreement complies with all
applicable provisions of the Advisers Act.
(vi) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any term, covenant or condition
by PMC Advisers of any indenture, mortgage, deed of trust,
note or any other agreement or instrument to which PMC
Advisers is a party or by which it or any of its assets or
properties or businesses may be bound or affected, where the
consequences of such default would have a material and adverse
effect on the assets, properties, business, results of
operations, prospects or condition (financial or otherwise) of
PMC Advisers.
(vii) To the best of such counsel's knowledge, PMC
Advisers is not in violation of any term or provision of its
articles of incorporation or by-laws and is not in violation
of any term or provision of any Permit, judgment, decree,
order, statute, rule or regulation, where the consequences of
such violation would have a material and adverse effect on the
assets or properties, businesses, results of operations,
prospects or condition (financial or otherwise) of PMC
Advisers.
(viii) No consent, approval, authorization or order
of any court or governmental or regulatory agency or body is
required for the performance of this Agreement or the
Management Agreement by PMC Advisers or the consummation of
the transactions contemplated hereby or thereby, except such
as have been obtained under the Advisers Act.
(ix) To the best of such counsel's knowledge,
there is no litigation or governmental or other proceeding or
investigation, before any court or before or by any public
body or board pending or threatened against, or involving the
<PAGE> 21
21
assets, properties or businesses of, PMC Advisers or any of
its officers or directors or its shareholder which if
adversely determined could have a material adverse effect upon
the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of PMC
Advisers.
(x) PMC Capital has obtained the Exemptive Order,
which is in full force and effect and, to the best of such
counsel's knowledge, no proceeding to withdraw the Exemptive
Order has been instituted or is threatened.
(i) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives
and their counsel and the Underwriters shall have received from
Simpson Thacher & Bartlett a favorable opinion, addressed to the
Representatives and dated such Closing Date, with respect to the
Shares, the Registration Statement and the Prospectus, and such other
related matters, as the Representatives may reasonably request, and
the Company shall have furnished to Simpson Thacher & Bartlett such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters.
(j) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives, and
dated such Closing Date, of an executive officer of the Company to the
effect that the signer of such certificate has reviewed and
understands the provisions of Section 517.075 of the Florida Statutes,
and represents that the Company has complied, and at all times will
comply, with all provisions of Section 517.075 and further, that as of
such Closing Date, neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba.
7. Covenants of the Company. (A) The Company covenants
and agrees as follows:
(a) The Company shall prepare the Prospectus in a form
approved by the Representatives and file such Prospectus pursuant to
Rule 424(b) under the Securities Act not later than the Commission's
close of business on the second business day following the execution
and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Securities Act, and
shall promptly advise the Representatives (i) when any amendment to
the Registration Statement shall have become effective, (ii) of any
request by the Commission for any amendment of the Registration
Statement or the Prospectus or for any additional information, (iii)
of the prevention or suspension of the use of any preliminary
prospectus or the Prospectus or of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that
purpose, (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale
in any jurisdiction or the initiation or threatening of any proceeding
for such purpose and (v) of the happening of any event during the
period when a Prospectus
<PAGE> 22
22
relating to the States is required to be delivered under the
Securities Act that in the judgment of the Company makes any statement
made in the Registration Statement or Prospectus untrue or that
requires the making of any changes in the Registration Statement or
the Prospectus in order to make the statements therein, in light of
the circumstances in which they are made, not misleading. The Company
shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and shall not
file any such proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use its best
efforts to prevent the issuance of any such stop order and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) Within the time period during which the Prospectus
relating to the Shares is required to be delivered under the
Securities Act, the Company shall comply with all requirements imposed
on it by the Securities Act and the Rules so far as is necessary to
permit the continuance of sales or dealings in the Shares as
contemplated hereby and by the Registration Statement and the
Prospectus. If, at any time when a prospectus relating to the Shares
is required to be delivered under the Securities Act and the Rules,
any event occurs as a result of which the Prospectus as then amended
or supplemented would include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend or supplement the
Prospectus to comply with the Securities Act or the Rules, the Company
promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 7(A), an amendment or
supplement which shall correct such statement or omission or an
amendment which shall effect such compliance.
(c) The Company shall make generally available to its
security holders and to the Representatives as soon as practicable,
but not later than 45 days after the end of the 12-month period
beginning at the end of the fiscal quarter of the Company during which
the Effective Date occurs (or 90 days if such 12-month period
coincides with the Company's fiscal year), an earnings statement
(which need not be audited) of the Company, covering such 12-month
period, which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 of the Rules.
(d) The Company shall furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including all exhibits thereto and amendments
thereof) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and all amendments thereof and,
so long as delivery of a prospectus by an Underwriter or dealer may be
required by the Securities Act or the Rules, as many copies of any
preliminary prospectus and the Prospectus and any amendments thereof
and supplements thereto as the Representatives may reasonably request.
<PAGE> 23
23
(e) The Company shall use its reasonable best efforts to
qualify, and shall cooperate with the Representatives and their
counsel in endeavoring to qualify, the Shares for offer and sale under
the laws of such jurisdictions as the Representatives may designate
and shall maintain such qualifications in effect so long as required
for the distribution of the Shares; provided, however, that the
Company shall not be required in connection therewith, as a condition
thereof, to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction or subject itself to
taxation as doing business in any jurisdiction.
(f) For a period of five years after the date of this
Agreement, the Company shall supply to the Representatives, and to
each other Underwriter who may so request in writing, copies of such
financial statements and other periodic and special reports as the
Company may from time to time distribute generally to the holders of
any class of its shares of beneficial interest and to furnish to the
Representatives a copy of each annual or other report it shall be
required to file with the Commission (including any Report on Form SR
required by Rule 463 of the Rules).
(g) Without the prior written consent of the
Representatives, for a period of 180 days after the date of the
Prospectus, the Company shall not issue, sell or register with the
Commission (other than on Form S-8 or on any successor form), or
otherwise dispose of, directly or indirectly, any shares of beneficial
interest of the Company (or any securities convertible into or
exercisable or exchangeable for equity securities of the Company),
except for the issuance of the Shares pursuant to the Registration
Statement, the issuance of Company Directed Shares pursuant to the
Purchase Agreements and the issuance of shares pursuant to the
Company's existing share option plans. In the event that during this
period, (i) any shares are issued pursuant to the Company's existing
share option plans or (ii) any registration is effected on Form S-8 or
on any successor form, the Company shall obtain the written agreement
of such grantee or purchaser or holder of such securities that, for a
period of six months after the date of the Prospectus, such person
will not, without the prior written consent of the Representatives,
offer for sale, sell, distribute, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, or exercise any
registration rights with respect to, any Common Shares (or any
securities convertible into, exercisable for, or exchangeable for any
shares of Common Shares) owned by such person.
(h) On or before completion of this offering, the Company
shall make all filings required under applicable securities laws and
by the American Stock Exchange (including any required registration
under the Exchange Act).
(i) The Company will apply the net proceeds from the sale
of the Shares to be sold by it hereunder and the sale of the Company
Directed Shares to be sold pursuant to the Purchase Agreements
substantially in accordance with the description set forth in the
Prospectus. The Company shall take all steps as shall be necessary to
<PAGE> 24
24
ensure that the Company shall not become an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(j) The Company shall use its best efforts to do and
perform all things required or necessary to be done and performed
under this Agreement by the Company prior to the Firm Shares Closing
Date or Option Share Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(k) For its taxable year ending December 31, 1995 and for
all subsequent taxable years, the Company will elect to qualify as a
real estate investment trust under the Code and will use its best
efforts to continue to meet the requirements of the Code and the Texas
Real Estate Investment Trust Act to qualify as a real estate
investment trust.
(l) The Company will maintain a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(B) The Company agrees to pay, or reimburse if paid by
the Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement, including without limitation those relating to:
(i) the preparation, printing, filing and distribution of the Registration
Statement, including all exhibits thereto, each preliminary prospectus, the
Prospectus, all amendments and supplements to the Registration Statement and
the Prospectus, and the printing, filing and distribution of this Agreement;
(ii) the preparation and delivery of certificates for the Shares to the
Underwriters; (iii) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the various jurisdictions
referred to in Section 7 (A) (e), including the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
registration and qualification and the preparation, printing, distribution and
shipment of preliminary and supplementary Blue Sky memoranda; (iv) the
furnishing (including costs of shipping and mailing) to the Representatives and
to the Underwriters of copies of each preliminary prospectus, the Prospectus
and all amendments or supplements to the Prospectus, and of the several
documents required by this Section to be so furnished, as may be reasonably
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of
the National Association of Securities Dealers, Inc. in connection with its
review of the terms of the public offering; (vi) the furnishing (including
costs of shipping and mailing) to the Representatives and to the Underwriters
of copies of all reports and information required by Section 7(A)(f); (vii)
<PAGE> 25
25
inclusion of the Shares and the Company Directed Shares for listing on the
American Stock Exchange; and (viii) all transfer taxes, if any, with respect to
the sale and delivery of the Shares by the Company to the Underwriters.
Subject to the provisions of Section 10, the Underwriters agree to pay, whether
or not the transactions contemplated hereby are consummated or this Agreement
is terminated, all costs and expenses incident to the performance of the
obligations of the Underwriters under this Agreement not payable by the Company
pursuant to the preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters.
8. Indemnification.
(a) The Company agrees to indemnity and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal fees and expenses of one
counsel representing all the Underwriters (except for certain situations set
forth in Section 8(d) where separate counsel is permitted, in which case
indemnification hereunder shall cover the reasonable legal fees and expenses of
all such counsel) and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto, or arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) on account of any losses, claims, damages
or liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use therein; and
provided further that the indemnification contained in this Section 8(a) with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by such Underwriter to any person if a copy of the
Prospectus shall not have been delivered or sent to such person within the time
required by the Securities Act and the regulations thereunder, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such preliminary prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
<PAGE> 26
26
In addition to its other obligations under this Section 8(a),
the Company agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(a), it will reimburse the Underwriters on a monthly
basis for all reasonable legal fees and expenses of one counsel representing
all the Underwriters (except for certain situations set forth in Section 8(d)
where separate counsel is permitted, in which case reimbursement hereunder
shall cover the reasonable legal fees and expenses of all such counsel) and
other reasonable expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceedings,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper, the
Underwriters shall promptly return it to the Company, together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Citibank, N.A. (the "Prime Rate"). Any such interim
reimbursement payments which are not made to you within 30 days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request.
It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in this paragraph (a),
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the NASD. Any such arbitration shall be commenced by service of a written
demand for arbitration or a written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding
arbitration shall not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice shall be
authorized to do so. Such arbitration shall be limited to the operation of the
interim reimbursement provisions contained in this paragraph (a) and shall not
resolve the ultimate propriety or enforceability of the other obligations
created by this Section 8.
(b) PMC Advisers agrees to indemnity and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal fees and expenses of one
counsel representing all the Underwriters (except for certain situations set
forth in Section 8(d) where separate counsel is permitted, in which case
indemnification hereunder shall cover the reasonable legal fees and expenses of
all such counsel) and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon (i) any untrue statement or alleged
untrue statement made by PMC Advisers
<PAGE> 27
27
in Section 5 of this Agreement or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto, or arising out of or are based upon any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading with respect to PMC Advisers and PMC
Capital; provided, however, that such indemnity shall not inure to the benefit
of any Underwriter (or any person controlling such Underwriter) on account of
any losses, claims, damages or liabilities arising from the sale of the Shares
to any person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary prospectus,
the Registration Statement or the Prospectus, or such amendment or supplement,
in reliance upon and in conformity with information furnished in writing to the
Company by the Representatives on behalf of any Underwriter specifically for
use therein; and provided further that the indemnification contained in this
Section 8(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Securities Act and the regulations thereunder, and the
untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in such preliminary prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. This indemnity agreement will be in addition to any
liability which PMC Advisers may otherwise have.
(c) Each Underwriter agrees, severally and not jointly,
to indemnity and hold harmless the Company, PMC Advisers, each person, if any,
who controls the Company or PMC Advisers within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, each trust manager of the
Company, each director of PMC Advisers, and each officer of the Company who
signs the Registration Statement to the same extent as the foregoing indemnity
from the Company and PMC Advisers to each Underwriter, but only insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which was
made in. any preliminary prospectus, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, contained in the
paragraph relating to stabilization on the inside front cover page of the
Prospectus and the statements contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each Underwriter to
indemnity the Company and PMC Advisers (including any controlling person,
trust manager, director or officer thereof) shall be limited to the net
proceeds received by the Company from such Underwriter.
(d) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 8(a), 8(b) or 8(c) shall be available
to any party who
<PAGE> 28
28
shall fail to give notice as provided in this Section 8(d) if the party to whom
notice was not given was unaware of the proceeding to which such notice would
have related and was prejudiced by the failure to give such notice but the
omission so to notify such indemnifying party of any such action, suit or
proceeding shall not relieve it from any liability that it may have to any
indemnified party for contribution or indemnification otherwise than under this
Section. In case any such action, suit or proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its
written consent. The Company and PMC Advisers will not, without the prior
written consent of the Representatives, settle, compromise or consent to the
entry of any judgment in any pending or threatened action, suit, proceeding or
claim in respect of which indemnification may be sought hereunder (whether or
not such Underwriter or any person controlling such Underwriter is a party to
such action, suit, proceeding or claim), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter and each
controlling person of such Underwriters from all liability relating to the
matters arising from such action, suit, proceeding or claim.
9. Contribution. In order to provide for just and
equitable contribution in circumstances in which the indemnification provided
for in Section 8 is due in accordance with its terms but for any reason is held
to be unavailable from the Company, PMC Advisers or the Underwriters, the
Company, PMC Advisers and the Underwriters shall contribute to the aggregate
losses, claims, damages and liabilities (including any investigation, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting any contribution received by the Company and PMC Advisers from
persons other than the Underwriters, such as persons who control the Company or
PMC Advisers within the meaning of the Securities Act, officers of the Company
who signed the Registration Statement, trust managers of the Company and
directors of PMC Advisers, who may also be liable for contribution) to which
<PAGE> 29
29
the Company, PMC Advisers and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and PMC Advisers on the one hand and the Underwriters on the other
from the offering of the Shares or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 8 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and PMC Advisers
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company and PMC Advisers
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts but before
deducting expenses) received by the Company, as set forth in the table on the
cover page of the Prospectus, bear to (y) the underwriting discounts received
by the Underwriters, as set forth in the table on the cover page of the
Prospectus, respectively. The relative fault of the Company and PMC Advisers
or the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact related to
information supplied by the Company and PMC Advisers or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, PMC Advisers
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 9 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 9, (i) in no case shall any Underwriter (except as may be provided in
the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) the Company and PMC Advisers shall be liable
and responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Underwriter, and each person, if any, who controls the Company or PMC
Advisers within the meaning of the Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed
the Registration Statement, each trust manager of the Company and each director
of PMC Advisers shall have the same rights to contribution as the Company and
PMC Advisers, subject in each case to clauses (i) and (ii) in the immediately
preceding sentence of this Section 9. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section, notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties from whom contribution may be sought shall not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this Section.
No party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its written
<PAGE> 30
30
consent. The Underwriters' obligations to contribute pursuant to this Section
9 are several in proportion to their respective underwriting commitments and
not joint.
10. Termination. This Agreement may be terminated with
respect to the Shares to be purchased on a Closing Date by the Representatives
by notifying the Company at any time
(a) in the absolute discretion of the Representatives at
or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the future
materially disrupt, the securities markets; (ii) if there has occurred
any new outbreak or material escalation of hostilities or other
calamity or crisis the effect of which on the financial markets of the
United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to
make it, in the reasonable judgment of the Representatives,
inadvisable or impracticable to market the Shares; (iv) if trading in
the Shares has been suspended by the Commission or trading generally
on the New York Stock Exchange, Inc. or on the American Stock
Exchange, Inc. has been suspended or limited, or minimum or maximum
ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities have been required, by said exchanges
or by order of the Commission, the National Association of Securities
Dealers, Inc., or any other governmental or regulatory authority; or
(v) if a banking moratorium has been declared by any state or Federal
authority, or
(b) at or before any Closing Date, that any of the
conditions specified in Section 6 shall not have been fulfilled when
and as required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company and PMC Advisers shall not be under any liability to
any Underwriter, and no Underwriter shall be under any liability to the Company
or PMC Advisers, except that (y) if this Agreement is terminated by the
Representatives or the Underwriters because of any failure, refusal or
inability on the part of the Company or PMC Advisers to comply with the terms
or to fulfill any of the conditions of this Agreement, the Company will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in
contemplation of performing their obligations hereunder and (z) no Underwriter
who shall have failed or refused to purchase the Shares agreed to be purchased
by it under this Agreement, without some reason sufficient hereunder to justify
cancellation or termination of its obligations under this Agreement, shall be
relieved of liability to the Company or to the other Underwriters for damages
occasioned by its failure or refusal.
11. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 10) to purchase on
any Closing Date the Shares agreed to be
<PAGE> 31
31
purchased on such Closing Date by such Underwriter or Underwriters, the
Representatives may find one or more substitute underwriters to purchase such
Shares or make such other arrangements as the Representatives may deem
advisable or one or more of the remaining Underwriters may agree to purchase
such Shares in such proportions as may be approved by the Representatives, in
each case upon the terms set forth in this Agreement. If no such arrangements
have been made by the close of business on the business day following such
Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10% of
the Shares that all the Underwriters are obligated to purchase on such
Closing Date, then each of the nondefaulting Underwriters shall be
obligated to purchase such Shares on the terms herein set forth in
proportion to their respective obligations hereunder; provided, that
in no event shall the maximum number of Shares that any Underwriter
has agreed to purchase pursuant to Section 1 be increased pursuant to
this Section 11 by more than one-ninth of such number of Shares
without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then the Company shall be entitled to an additional
business day within which it may, but is not obligated to, find one or
more substitute underwriters reasonably satisfactory to the
Representatives to purchase such Shares upon the terms set forth in
this Agreement.
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of
not more than five business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or Prospectus) may be effected by the Representatives
and the Company. If the number of Shares to be purchased on such Closing Date
by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing Date, and
none of the nondefaulting Underwriters or the Company shall make arrangements
pursuant to this Section within the period stated for the purchase of the
Shares that the defaulting Underwriters agreed to purchase, this Agreement
shall terminate with respect to the Shares to be purchased on such Closing Date
without liability on the part of any nondefaulting Underwriter to the Company
or PMC Advisers and without liability on the part of the Company or PMC
Advisers, except in both cases as provided in Sections 7(B), 8, 9 and 10. The
provisions of this Section shall not in any way affect the liability of any
defaulting Underwriter to the Company, PMC Advisers or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
12. Miscellaneous. The respective agreements,
representations, warranties, indemnities and other statements of the Company or
its officers, of PMC Advisers or its officers and of the Underwriters set forth
in or made pursuant to this Agreement shall remain in full force and effect,
regardless of any investigation made by or on behalf of any
<PAGE> 32
32
Underwriter, the Company or PMC Advisers or any of the officers, trust manager,
directors or controlling persons referred to in Sections 8 and 9 hereof, and
shall survive delivery of and payment for the Shares. The provisions of
Sections 7(B), 8, 9 and 10 shall survive the termination or cancellation of
this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and trust managers and officers of the
Company, and their respective successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of Shares from any
Underwriter merely because of such purchase.
All notices and communications hereunder shall be in writing
and mailed or delivered or by telephone or telegraph if subsequently confirmed
in writing, (a) if to the Representatives, c/o Oppenheimer & Co., Inc.,
Oppenheimer Tower, World Financial Center, New York, New York 10281 Attention:
Mark Biderman, and (b) if to the Company, to its agent for service as such
agent's address appears on the cover page of the Registration Statement.
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
<PAGE> 33
33
Please confirm that the foregoing correctly sets forth the
agreement among us.
Very truly yours,
PMC COMMERCIAL TRUST
By:
-----------------------------------
Lance B. Rosemore
President and
Chief Executive Officer
PMC ADVISERS, INC.
By:
-----------------------------------
Lance B. Rosemore
President and
Chief Executive Officer
Confirmed:
OPPENHEIMER & CO., INC.
FAHNESTOCK & CO., INC.
J.C. BRADFORD & CO.
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I
annexed hereto.
By OPPENHEIMER & CO., INC.
By:
-----------------------------------
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares to
Be Purchased
--------------
Name
<S> <C>
Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . .
J.C. Bradford & Co... . . . . . . . . . . . . . . . . .
Fahnestock & Co., Inc... . . . . . . . . . . . . . . .
------------
2,000,000
</TABLE>
<PAGE> 1
Exhibit 4
[FRONT OF STOCK CERTIFICATE]
BENEFICIAL INTEREST ORGANIZED UNDER THE LAWS BENEFICIAL INTEREST
OF THE STATE OF TEXAS
NUMBER SHARES
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR
IN THE CITY OF NEW YORK, NEW YORK CERTAIN DEFINITIONS
CUSIP 693434 10 2
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST OF
THE PAR VALUE OF $.01 EACH OF
PMC COMMERCIAL TRUST
transferable only on the books of the Trust by the holder hereof in person or
by duly authorized attorney upon the surrender of this certificate is properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal and the facsimile signatures of the duly
authorized officers of the Trust.
Dated
PMC COMMERCIAL TRUST
TRUST
SEAL
PRESIDENT TEXAS ASSISTANT SECRETARY
1993
<PAGE> 2
[BACK OF STOCK CERTIFICATE]
PMC COMMERCIAL TRUST
The following abbreviations, when used in the inscription of the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF TRAN MIN ACT -- ______ Custodian ________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as tenants in common under Uniform Transfers to Minors
Act ___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the beneficial interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said shares of beneficial interest on the books of the within
named Trust with full power of substitution in the premises.
Dated:________________________
______________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed by:
__________________________
<PAGE> 1
Exhibit 5
<TABLE>
<S> <C> <C>
5400 Renaissance Tower WINSTEAD (214) 745-5400
1201 Elm Street SECHREST Telecopier (214) 745-5390
Dallas, Texas 75270-2199 & MINICK
A Professional Corporation
DALLAS HOUSTON AUSTIN Attorneys & Counselors Direct Dial:
MEXICO CITY 214/745-5274
</TABLE>
June 7, 1996
PMC Commercial Trust
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Ladies and Gentlemen:
We have acted as counsel to PMC Commercial Trust (the "Company") in
connection with the registration and sale under the Securities Act of 1933, as
amended (the "Securities Act"), by the Company of 2,060,000 common shares of
beneficial interest, par value $.01 per share (the "Common Shares") (plus an
underwriters' over-allotment option for 300,000 Common Shares, collectively,
the "Offered Shares") pursuant to a Registration Statement on Form S-11 (File
No. 333-2757) (the "Registration Statement"). In our capacity as counsel to
the Company, we have participated in various proceedings relating to the
Company and we are familiar with its affairs. In addition, we have examined
the records of the Company and such other records, instruments and documents as
we have deemed necessary as a basis for this opinion. Based upon such
participation and examination, we are of the opinion that the Offered Shares
have been duly and validly authorized and, when issued against payment of the
consideration therefor, will be legally authorized, fully-paid and
non-assessable.
The opinions expressed herein are as of the date hereof, and are based
upon facts and conditions presently known to us, the assumptions set forth
herein and the laws and regulations currently in effect, and we do not
undertake and hereby disclaim, any obligation to advise you of any change with
respect to any matter set forth herein.
The opinions expressed herein are limited to the laws of the State of
Texas and the laws of the United States of America.
We express no opinion as to any matter other than as is expressly set
forth herein, and no opinion is to, or may, be inferred or implied herefrom.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the prospectus contained therein. In giving our consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations of the
Securities and Exchange Commission thereunder.
Yours very truly,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Kenneth L. Betts
-----------------------------------
Kenneth L. Betts
<PAGE> 1
Exhibit 8
<TABLE>
<S> <C> <C>
5400 Renaissance Tower WINSTEAD (214) 745-5400
1201 Elm Street SECHREST Telecopier (214) 745-5390
Dallas, Texas 75270-2199 & MINICK
A Professional Corporation
DALLAS HOUSTON AUSTIN Attorneys & Counselors Direct Dial:
MEXICO CITY 214/745-5274
</TABLE>
June 7, 1996
PMC Commercial Trust
17290 Preston Road
Dallas, Texas 75252
Ladies and Gentlemen:
We have acted as counsel to PMC Commercial Trust (the "Company") in
connection with the Registration Statement on Form S-11 (No. 333-2757),
initially filed with the Securities and Exchange Commission on April 23, 1996,
as amended (the "Registration Statement"). This opinion relates (i) to the
Company's qualification for federal income tax purposes as a real estate
investment trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), for taxable years beginning
with the taxable year ending December 31, 1996 and (ii) to the accuracy of the
information contained in the "FEDERAL INCOME TAX CONSIDERATIONS" section of the
Registration Statement to the extent it constitutes matters of law or legal
conclusions.
For the purpose of rendering our opinion, we have examined and are
relying upon the truth, accuracy and completeness, at all relevant times, of
the statements and representations contained in the following documents:
Item 1. The Declaration of Trust and the Bylaws of the Company;
Item 2. The Registration Statement;
Item 3. Representations made to us by the Company through Messrs. Jan
F. Salit, Executive Vice President and Chief Investment Officer, and Barry N.
Berlin, Chief Financial Officer, in that certain Certificate to Counsel
Regarding Certain Real Estate Investment Trust Qualification Requirements (the
"Certificate") dated of even date herewith and delivered to us in connection
with the Registration Statement and this letter.
<PAGE> 2
PMC Commercial Trust
June 7, 1996
Page 2
In connection with rendering this opinion, we have assumed to be true
and are relying upon, without any independent investigation or review thereof,
the following:
1. The authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to
us as copies, and authenticity of the originals of such documents.
2. The genuineness of all signatures, the due authorization,
execution and delivery of all documents by all parties thereto and the due
authority of all persons executing such documents.
3. The Company filed a proper election to be taxed as a REIT
with its timely filed federal income tax return for the taxable year ending
December 31, 1993, and that the Company has not caused such election to be
terminated or revoked.
Based on our examination of the foregoing items and our review of such
other documents and information pertaining to the Company as we have deemed
appropriate, subject to the assumptions, limitations and qualifications set
forth herein, we are of the opinion that (i) if the Company is operated as
described in the Registration Statement and in the Certificates, the Company
will be able to qualify as a REIT under the Code for its taxable year ending
December 31, 1996 and for subsequent taxable years, provided that after the date
hereof, the Company continues to be organized and operated as described in its
Registration Statement and in the Certificates, and therefore continues to
satisfy the income tests, asset tests, and distribution, shareholder, record
keeping and other applicable REIT requirements under the Code as summarized in
the Registration Statement, and (ii) the information in the prospectus included
in the Registration Statement under the caption "FEDERAL INCOME TAX
CONSIDERATIONS," to the extent it constitutes matters of law or legal
conclusions, is correct in all material respects.
In addition to the matters set forth above, this opinion is subject to
the following exceptions, limitations and qualifications:
1. Our opinion expressed herein is based upon our interpretation
of the existing provisions of the Code and existing judicial decisions,
administrative regulations, published revenue rulings and revenue procedures.
Our opinion is not binding upon the Internal Revenue Service or courts and
there is no assurance that the Internal Revenue Service will not challenge the
conclusions set forth herein. No assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. We undertake no obligation to advise you of changes in law
which may occur after the date hereof.
<PAGE> 3
PMC Commercial Trust
June 7, 1996
Page 3
2. Our opinion is limited to the United States federal income tax
matters addressed herein, and no other opinions are rendered with respect to
any other matter not specifically set forth in the foregoing opinion.
In the event any one of the statements, representations, or
assumptions we have relied upon to issue this opinion is incorrect in a
material respect, our opinion might be adversely affected and may not be relied
upon.
We hereby consent to the reference to us under the caption "FEDERAL
INCOME TAX CONSIDERATIONS" in the Registration Statement, and to the filing of
this opinion as an Exhibit to the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Thomas R. Helfand
-----------------------------------
Thomas R. Helfand
<PAGE> 1
Exhibit 10.1
INVESTMENT MANAGEMENT AGREEMENT
This Investment Management Agreement (the "Agreement") dated this 31st
day of December, 1995 by and between PMC Commercial Trust, a Texas real estate
investment trust (the "Company"), and PMC Advisers, Inc., a Texas corporation
("PMC Advisers" or the "Investment Manager"), a wholly-owned subsidiary of PMC
Capital, Inc. ("PMC Capital").
A. CERTAIN DEFINITIONS
As used in this Agreement, the following terms have the meanings set
forth below:
"Affiliate" shall mean a Person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned Person.
"Average Annual Value of All Invested Assets" shall mean the book
value of the Invested Assets determined in accordance with GAAP on the first
day of the year and on the last day of each quarter of such year divided by
five.
"Average Common Equity Capital" shall mean the Common Equity Capital
on the first day of the year and on the last day of each quarter of such year,
divided by five.
"Average Quarterly Value of All Assets" shall mean the book value of
total assets of the Company or any Person wholly-owned (directly or indirectly)
by the Company determined in accordance with GAAP on the first day of the
quarter and on the last day of the quarter, divided by two.
"Average Quarterly Value of All Invested Assets" shall mean the book
value of Invested Assets determined in accordance with GAAP on the first day of
the quarter and on the last day of the quarter, divided by two.
"Common Equity Capital" shall mean the sum of the stated capital plus
the additional paid-in capital for the Common Shares.
"GAAP" shall mean generally accepted accounting principles.
"Independent Trust Managers" shall mean the trust managers of the
Company who are not affiliated with PMC Capital or its subsidiaries.
"Invested Assets" shall have the meaning set forth in paragraph 2 of
this Agreement.
"Person" shall mean an individual, corporation, partnership,
association, trust or any unincorporated organization or other entity.
"Return on Average Common Equity Capital" means the net income of the
Company determined in accordance with GAAP, less preferred dividends, if any,
divided by the Average Common Equity Capital.
<PAGE> 2
B. PURPOSE OF THE COMPANY
The Company intends primarily to originate business loans (i) to small
business enterprises that exceed the net worth, asset, income, number of
employees or other limitations applicable to the Small Business Administration
("SBA") programs utilized by PMC Capital, (ii) in excess of $1,100,000 to small
business enterprises without regard to SBA eligibility requirements, (iii) for
which PMC Capital does not have available funds to make such loans or (iv) that
cannot be originated by PMC Capital or its subsidiaries as a result of industry
concentration limitations. All such loans (collectively, the "Primary
Investments") will be secured by first liens on real estate and subject to the
Company's underwriting criteria. In addition, the Company may (i) purchase
from the Resolution Trust Company, the Federal Deposit Insurance Corporation
and other sellers loans on which payments are current at the time of the
Company's commitment to purchase and which meet the Company's underwriting
criteria, (ii) invest in other commercial loans secured by real estate and
(iii) invest in real estate (collectively, the "Other Investments"). At least
75% of the assets of the Company will be invested in the Primary Investments
and up to 25% of the assets of the Company may be invested by the Company in
Other Investments provided that such Other Investments do not affect the
ability of the Company to maintain its qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
Concurrently with the execution of this Agreement, the Company, PMC
Advisers, and PMC Capital shall enter into a Loan Origination Agreement in the
form of Exhibit A hereto (the "Loan Origination Agreement") pursuant to which
PMC Advisers shall determine the allocation of the loan origination
opportunities to either the Company or PMC Capital.
The Company's primary investment objective is to obtain current income
from interest payments and other related fee income from Primary Investments
originated by it and Other Investments acquired by it and, in each case, owned
by the Company or by any Person wholly-owned (directly or indirectly) by the
Company (collectively, the "Invested Assets") for distribution to its
shareholders. The Company will invest in Invested Assets selected by the
Investment Manager in accordance with underwriting criteria established by the
trust managers with the intention of creating a portfolio of investments
intended to preserve the capital base of the Company and generate income for
distribution to the Company's shareholders. The Company's investments are
anticipated to be held primarily to maturity.
C. THE INVESTMENT MANAGER
PMC Advisers shall act as the investment adviser to the Company,
registered under the Investment Advisers Act of 1940, as amended. The Company
hereto engages the services of PMC Advisers as the Company's Investment
Manager.
D. OBLIGATIONS OF THE INVESTMENT MANAGER
As the Investment Manager, PMC Advisers will:
(1) advise the Company as to the acquisition and
disposition of Invested Assets and temporary investments
(collectively, "Investments") in accordance with the Company's
underwriting criteria and investment policies;
(2) provide the Company with office space and services to
the extent required by the Company's trust managers, officers and
employees;
(3) maintain the Company's books of account and other
records and files;
<PAGE> 3
(4) report to the Company's trust managers, or to any
committee or officer of the Company acting pursuant to the authority
of the trust managers, at such times and in such detail as the trust
managers deem appropriate in order to enable the Company to determine
that its investment policies are being observed and implemented;
(5) undertake its obligations pursuant hereto and any
other activities undertaken by PMC Advisers on the Company's behalf
subject to any directives of the Company's trust managers or any duly
constituted committee or officer of the Company acting pursuant to
authority of the Company's trust managers;
(6) subject to the Company's investment policies and any
specific directives from the Company's trust managers, to effect
acquisitions and dispositions for the Company's account in the
Investment Manager's discretion and to arrange for the documents
representing Investments acquired to be delivered to the Company's
custodian;
(7) on a continuing basis, monitor, manage and service
the Company's Investments; and
(8) arrange debt and equity financing for the Company,
subject to policies adopted by the Company's trust managers.
E. EXPENSES TO BE PAID BY THE INVESTMENT MANAGER
The Investment Manager will pay for its own account all expenses
incurred by it in rendering the services hereunder without regard to the
compensation received by the Investment Manager from the Company hereunder.
Without limiting the generality of the foregoing, the Investment Manager shall
bear the following expenses incurred in connection with the performance of its
duties under this Agreement:
(1) employment expenses of the personnel employed by the
Investment Manager (other than fees paid and reimbursement of expenses
made to independent managers, independent contractors, mortgage
services, consultants, managers, local property managers or agents
employed by or on behalf of the Company including such persons or
entities which may be Affiliates of the Investment Manager when acting
in any such capacity, all of which shall be the responsibility of the
Company), including but not limited to, salaries, wages, payroll taxes
and the costs of employee benefit plans;
(2) rent, telephone, utilities, office furniture,
equipment and machinery (including computers, to the extent utilized)
and other office expenses of the Investment Manager, except to the
extent such expenses relate solely to an office maintained by the
Company separate from the office of the Investment Manager; and
(3) miscellaneous administrative expenses incurred in
supervising, monitoring and inspecting real property and such other
investments of the Company or relating to the performance by the
Investment Manager of its obligations hereunder.
Notwithstanding the foregoing, any share options granted by the
Company to directors, officers and key employees of the Investment Manager
shall not be an expense to be borne by the Investment Manager pursuant to this
paragraph 5.
<PAGE> 4
F. EXPENSES TO BE PAID BY THE COMPANY
Except as expressly otherwise provided in this Agreement, the Company
will pay any expenses incurred by the Company and will reimburse the Investment
Manager promptly, against the Investment Manager's voucher, for any such
expenses paid by the Investment Manager for the Company's account. Without
limiting the generality of the foregoing, such expenses shall include:
(i) all expenses of the Company's organization and of any
offering and sale by the Company of its shares;
(ii) expenses of the Company operations, except as
otherwise provided in paragraph 5 above;
(iii) financing costs and debt service with respect to
indebtedness of the Company;
(iv) taxes on income and taxes and assessments on real
property, if any, and all other taxes applicable to the Company;
(v) legal, auditing, accounting, underwriting, brokerage,
listing, reporting, registration and other fees, and printing,
engraving and other expenses and taxes incurred in connection with the
issuance, distribution, transfer, trading, registration and stock
exchange listing of the Company's securities;
(vi) expenses of organizing, revising, amending,
converting, modifying or terminating the Company;
(vii) fees and expenses paid to trust managers and officers
who are not employees or Affiliates of the Investment Manager,
independent advisors, independent contractors, mortgage services,
consultants, managers, local property managers or management firms,
accountants, attorneys and other agents employed by or on behalf of
the Company and out-of-pocket expenses of trust managers of the
Company;
(viii) expenses directly connected with the acquisition,
disposition and ownership of Invested Assets including real estate
interests or other property (including the costs of foreclosure,
insurance premiums, legal services, brokerage and sales commissions,
maintenance, repair, improvement and local management of property),
other than expenses with respect thereto of employees of the
Investment Manager to the extent that such expenses are to be borne by
the Investment Manager pursuant to paragraph 5 above;
(ix) all insurance costs incurred in connection with the
Company (including officer and trust manager liability insurance, if
any);
(x) expenses connected with payments of dividends or
interest or contributions in cash or any other form made or caused to
be made by the trust managers to holders of securities of the Company;
(xi) all expenses connected with communications to holders
of securities of the Company and other bookkeeping and clerical work
necessary to maintaining relations with holders of securities,
including the cost of printing and mailing certificates for securities
and proxy solicitation materials and reports to holders of the Company
securities;
<PAGE> 5
(xii) transfer agent's, registrar's and indenture trustee's
fees and charges;
(xiii) legal, accounting and auditing fees and expenses; and
(xiv) expenses relating to any office or office facilities
maintained by the Company separate from the office of the Investment
Manager.
If the Company uses the services of attorneys or paraprofessionals on the staff
of the Investment Manager in lieu of outside counsel for purposes other than
the performance of the services to be performed by the Investment Manager
hereunder, the Company will reimburse the Investment Manager for such services
at hourly rates calculated to cover the cost of such services, as well as for
incidental disbursements.
G. RECEIPT OF FEES
All fees that may be paid to the Investment Manager by any person in
connection with any investment transaction in which the Company participates or
proposes to participate shall be paid over or credited to the Company. The
Investment Manager may, on the other hand, retain for its own account any fees
paid to it by any such person for any services rendered to such person which is
not related to any such investment transaction. For this purpose, any fees
paid for services rendered by attorneys on the staff of the Investment Manager
in connection with any such investment transaction shall be treated as
transaction costs and shall not be deemed to be fees paid to the Investment
Manager in connection with any investment transaction. The Investment Manager
will report to the Company's trust managers not less often than quarterly all
fees received by the Investment Manager from any source whatever and whether,
in its opinion, any such fee is one that the Investment Manager is entitled to
retain under the provisions of this paragraph. In the event that any trust
manager should disagree, the matter shall be conclusively resolved by a
majority of the trust managers, including a majority of the Independent Trust
Managers.
H. COMPENSATION OF THE INVESTMENT MANAGER
As the Investment Manager's sole and exclusive compensation for its
services to be rendered pursuant to the terms set out above, the Company will,
during the term of this Agreement pay to the Investment Manager the following
fees, beginning as of the date of this Agreement:
Quarterly in arrears, a base fee ("Base Fee") consisting of a
quarterly servicing fee of .125% of the Average Quarterly Value of All
Assets and a quarterly advisory fee of .25% of the Average Quarterly
Value of All Invested Assets. In addition, commencing January 1, 1996
for each calendar year during which the Company's annual Return on
Average Common Equity Capital after deduction of the Base Fee (the
"Actual Return") exceeds 6.69% (the "Minimum Return"), the Company
will pay the Investment Manager an additional advisory fee (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 the Minimum Return, up to
a maximum of one percent (1%) per annum. The Annual Fee will be
earned only to the extent that the annual Return on Average Common
Equity Capital after deduction of the Base Fee and Annual Fee is at
least equal to the Minimum Return. All such advisory fees will be
reduced by fifty percent (50%) with respect to the value of Invested
Assets that exceed common shareholders' equity as a result of
leverage. Notwithstanding the foregoing or any other provision
contained herein, the Base Fee and Annual Fee payable to the
Investment Manager hereunder shall be reduced for each quarter during
the term of this
<PAGE> 6
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, or by any Person wholly-owned (directly or indirectly) by the
Company to any third party which is unaffiliated with the Company or
the Investment Manager for the servicing of (i) any Invested Assets or
(ii) any assets included within the definition of "Average Quarterly
Value of All Assets."
The Company will pay such fees as soon as practicable after the values of the
Company's assets as of the end of each calendar quarter and each year have been
determined by its trust managers. If the commencement or termination of the
Investment Manager's services hereunder does not coincide with the first or
last day, as the case may be, of a calendar quarter, then any fee determined in
accordance with this paragraph shall be multiplied by the ratio of the number
of days in such quarter during which the Investment Manager rendered services
to the total number of days in such quarter that this Agreement was in effect.
Notwithstanding any other provision of this Agreement to the contrary,
for the six month period following any public offering of Common Shares by the
Company (other than pursuant to the Company's dividend reinvestment plan or any
employee/trust manager benefit plan), no additional servicing fees will be
charged by the Investment Manager with respect to the proceeds received from
such public offering. In addition, the proceeds of any such offering will not
be included in Common Equity Capital for determining the reduction of the
Annual Fee as a result of leverage for such six month period.
I. INDEMNIFICATION OF THE INVESTMENT MANAGER
The Company confirms that in performing services hereunder the
Investment Manager (including its directors, officers and employees) will be an
agent of the Company for the purpose of the indemnification provisions of the
Company's Declaration of Trust and Bylaws, subject, however, to the same
limitations as though the Investment Manager were a director or officer of the
Company. The Investment Manager shall not be liable to the Company, its
shareholders or its creditors except for violations of law or for conduct which
would preclude the Investment Manager from being indemnified under such
provisions.
J. TERM OF THE AGREEMENT; TERMINATION
The term of this Agreement shall commence on the first day of January
1996 and shall remain in effect and is renewable annually thereafter by the
Company, if (i) a majority of the Independent Trust Managers determines that
(A) the Investment Manager's performance has been satisfactory and (B) the
terms of this Agreement are appropriate in light of the Company's performance
and then existing economic conditions and (ii) a majority of the independent
directors of the Investment Manager approve the renewal of this Agreement.
Notwithstanding any other provision of this Agreement to the contrary,
this Agreement, or any extension thereof, may be terminated by either party
thereto upon at least sixty (60) days' notice to the other party specifying the
effective date of such termination. Such termination, in the case of the
Company, must be approved by a majority vote of the Independent Trust Managers
or by a vote of the holders of more than two-thirds of the outstanding shares
of the Company, and, in the case of the Investment Manager, by a majority vote
of the independent directors of the Investment Manager.
<PAGE> 7
K. ASSIGNMENT, AMENDMENTS AND WAIVERS
The Company may terminate this Agreement at any time in the event of
its assignment by the Investment Manger except an assignment to a corporation,
association, trust or other successor organization which may take over the
property and carry on the affairs of the Investment Manager, provided that
following such assignment the Persons who controlled the operations of the
Investment Manager on the date such Investment Manager became an advisor to the
Company shall control the operation of the successor organization, including
the performance of its duties under this Agreement, and they shall be bound by
the same restrictions by which they were bound prior to such assignment;
however, if at any time subsequent to such an assignment such Persons shall
cease to control the operations of the successor organization, the Company may
thereupon terminate this Agreement. Such an assignment or any other assignment
of this Agreement by the Investment Manager shall bind the assignee hereunder
in the same manner as the Investment Manager is bound hereunder. This
Agreement shall not be assignable by the Company without the prior written
consent of the Investment Manager, except in the case of any assignment by the
Company to a Person which is the successor to the Company, in which case such
successor shall be bound hereby and by the terms of said assignment in the same
manner and to the same extent as the Company is bound hereby. Any successor
organization that is a permitted assignee under this paragraph, whether a
successor to the Investment Manager or to the Company, shall be obligated to
execute such agreements, certificates or other documents as the nonassigning
party shall reasonably request to evidence that such successor organization is
bound hereby.
This Agreement may not be amended, supplemented or discharged, and
none of its provisions may be modified, except expressly by an instrument in
writing signed by the party to be charged, provided that, in the case of the
Company, such amendment, supplement, discharge or modification must be approved
by a majority vote of the Independent Trust Managers or by a vote of the
holders of more than two-thirds of the outstanding shares of the Company and,
in the case of the Investment Manager, such amendment, supplement, discharge or
modification must be approved by a majority vote of the independent directors
of the Investment Manager. Any term or provision of this Agreement may be
waived, but only in writing by the party which is entitled to the benefit of
that provision. No waiver by any party of any default with respect to any
provision, condition or requirement hereof shall be deemed to be a continuing
waiver in the future thereof or a waiver of any other provision, condition or
requirement hereof; nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
L. OTHER ACTIVITIES OF INVESTMENT MANAGER
Nothing herein shall prevent the Investment Manager or its Affiliates
from engaging in other activities or businesses or from acting as advisor to
any other Person (including other real estate investment trusts) or from
managing other investments including those of investors or investments advised,
sponsored or organized by the Investment Manager even though such Person has
investment policies and objectives similar to those of the Company; provided,
however, that the Investment Manager shall notify the Company in writing in the
event that it does so act (or intends to so act) as an advisor to another real
estate investment trust. The Investment Manager may also render such services
to joint ventures and partnerships in which the Company is a co-venturer or
partner and to the other entities in such joint ventures and partnerships.
Except with respect to loan origination opportunities allocated pursuant to the
Loan Origination Agreement, the Investment Manager shall be free from any
obligation to present to the Company any particular investment opportunity
which comes to the Investment Manager. In addition, nothing herein shall
prevent any shareholder or Affiliate of the Investment Manager from
<PAGE> 8
engaging in any other business or from rendering services of any kind to any
other corporation, partnership or other entity (including competitive business
activities).
Directors, officers, employees and agents of the Investment Manager or
of its Affiliates may serve as trust managers, officers, employees, agents,
nominees or signatories of the Company. When executing documents or otherwise
acting in such capacities for the Company, such persons shall use their
respective titles in the Company. Such persons shall receive from the Company
no compensation for their services to the Company in such capacities.
M. BANK ACCOUNTS
The Investment Manager shall establish and maintain one or more bank
accounts in its own name or, at the direction of the trust managers, in the
name of the Company, and shall collect and deposit into such account or
accounts and disburse therefrom any monies on behalf of the Company, provided
that no funds in any such account shall be commingled with any funds of the
Investment Manager or any other Person. The Investment Manager shall from time
to time render an appropriate accounting of such collections and payments to
the trust managers and to the auditors of the Company.
N. PROTECTION OF INVESTMENTS
The Investment Manager shall use its efforts, in cooperation with the
legal counsel to the Company, as deemed appropriate in the Investment Manager's
reasonable discretion, (a) to verify title to or procure title insurance in
respect of any property in which the Company makes or proposes to make any
investment; (b) to verify that any mortgage securing any Investment of the
Company shall be a valid lien upon the mortgaged property according to its
terms; that any insurance or guaranty issued by the Federal Housing Authority,
the Veterans Administration or any similar agency of the United States or
Canada, or any subdivision thereof, or any private mortgage insurance company,
upon which the trust managers rely, is valid and in full force and effect and
enforceable according to its terms; and that any commitments to provide
permanent financing on property with respect to which the Company is furnishing
interim loans are satisfactory; and (c) to carry on the policies from time to
time specified by the trust managers with regard to the protection of the
Company's Investments.
O. RECORDS
The Investment Manager shall maintain appropriate books of account and
records relating to services performed pursuant hereto, which books of account
and records shall be available for inspection by representatives of the Company
upon reasonable notice during normal business hours.
P. REIT QUALIFICATION
Anything else in this Agreement to the contrary notwithstanding, the
Investment Manager shall not take any action (including, without limitation,
furnishing or rendering services to tenants of property or managing real
property), which action, in its judgment made in good faith, or in the judgment
of the trust managers as transmitted to the Investment Manager in writing,
would (a) adversely affect the status of the Company as a real estate
investment trust as defined and limited in the Internal Revenue Code of 1986,
as amended, or which would make the Company subject to the Investment Company
Act of 1940, as amended, if not in the best interest of the Company's
shareholders or (b) violate any law, rule, regulation or statement of policy of
any government body or agency having jurisdiction over the Company or over its
securities, or (c) otherwise not be permitted by the Declaration of Trust or
Bylaws of the Company, except if such
<PAGE> 9
action shall be ordered by the trust managers, in which event the Investment
Manager shall promptly notify the trust managers of the Investment Manager's
judgment that such action or omission to act would adversely affect such status
or violate any such law, rule or regulation or the Declaration of Trust or
Bylaws of the Company and shall refrain from taking such action pending further
clarification or instructions from the trust managers. In addition, the
Investment Manager shall take such affirmative steps which, in its good faith
judgment, or in the judgment of the trust managers as transmitted to the
Investment Manager in writing, would prevent or cure any action described in
(a), (b) or (c) above.
Q. SELF-DEALING
Neither the Investment Manager nor any Affiliate of the Investment
Manager shall sell any property or assets to the Company or purchase any
property or assets from the Company, directly or indirectly, except as approved
by a majority of the Independent Trust Managers, provided that any Person
wholly-owned (directly or indirectly) by the Company may sell property or
assets to the Company or purchase assets from the Company without such
approval. In addition, except as approved by a majority of the Independent
Trust Managers, neither the Investment Manager nor any Affiliate of the
Investment Manager shall receive any commission or other remuneration, directly
or indirectly, in connection with the activities of the Company (except as
expressly provided herein) or any joint venture or partnership in which the
Company is a party, unless such joint venture or partnership is wholly-owned
(directly or indirectly) by the Company. Except for compensation received by
the Investment Manager pursuant to paragraph 8 hereof, all commissions or other
remuneration received by the Investment Manager or an Affiliate of the
Investment Manager and not approved by the Independent Trust Managers under
this paragraph 17 shall be reported to the Company annually within ninety (90)
days following the end of the Company's fiscal year.
R. NO PARTNERSHIP OR JOINT VENTURE
The Company and the Investment Manager are not partners or joint
venturers with each other and neither the terms of this Agreement nor the fact
that the Company and the Investment Manager have joint interest in any one or
more investments shall be construed so as to make them such partners or joint
venturers or impose any liability as such on either of them.
S. FIDELITY BOND
The Investment Manager shall not be required to obtain or maintain a
fidelity bond in connection with the performance of its services hereunder.
T. JURISDICTION
This Agreement shall be governed by the laws of Texas.
U. LIMITATION OF LIABILITY
The Declaration of Trust establishing the Company (the "Declaration"),
a copy of which is duly filed with the County Clerk for Dallas County, Texas,
provides that the name "PMC Commercial Trust" refers to the trust managers
under the Declaration collectively as trust managers, but not individually or
personally; and that no trust manager, officer, shareholder, employee or agent
of the Company or its subsidiaries shall be held to any personal liability,
jointly or severally, for any obligation of, or claim against, the Company or
its subsidiaries. All persons dealing with the Company, in any way, shall look
only to the assets of the Company for the payment of any sum or the performance
of any obligations. Notwithstanding the foregoing,
<PAGE> 10
the Investment Manager hereby acknowledges and agrees that it shall look only
to the assets of the Company for the payment of any sum or performance of any
obligations due by or from the Company pursuant to the terms and provisions
hereof. Furthermore, except as otherwise expressly provided herein, in no
event shall the Company (original or successor) ever be liable to the
Investment Manager for any indirect or consequential damages suffered by the
Investment Manager from whatever cause.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
PMC ADVISERS, INC. PMC COMMERCIAL TRUST
By: /s/ Lance B. Rosemore By: /s/ Lance B. Rosemore
------------------------------ ------------------------------
Lance B. Rosemore Lance B. Rosemore
President President
<PAGE> 1
EXHIBIT 10.8
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MARKETING/RESERVE AGREEMENT
======================================================================
======================================================================
U.S. FRANCHISE SYSTEMS, INC.
AND
PMC COMMERCIAL TRUST
<PAGE> 2
MARKETING/RESERVE AGREEMENT
THIS MARKETING/RESERVE AGREEMENT (this "Agreement") made and entered
into between U.S. FRANCHISE SYSTEMS, INC., a Delaware Corporation (hereinafter
referred to as "USFS"), with its principal office located at 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329 and PMC COMMERCIAL TRUST, a Texas
real estate investment trust (hereinafter referred to as "PCC"), with its
principal office located at 17290 Preston Road, 3rd Floor, Dallas, Texas 75252.
W I T N E S S E T H:
WHEREAS, USFS is a franchising company that owns the franchise rights
to the "Microtel" motels ("Microtel"); and
WHEREAS, PCC is, among other things, engaged in the business of
lending money for purposes of acquiring, constructing, owning and operating
motels; and
WHEREAS, USFS and PCC desire that USFS present to franchisees, PCC's
financing programs for the purpose of providing financing to USFS's franchisees
for the acquisition of land ("Franchise Property") and/or construction of
Microtel motels (the Franchise Property with all buildings and other
improvements thereon hereinafter called the "Franchise Facility");
NOW, THEREFORE, in consideration of the premises, and for other
valuable consideration, the receipt and sufficiency of which are acknowledged,
the parties hereto hereby agree as follows:
SECTION 1. MARKETING:
1.1. PROVISION OF INFORMATION TO FRANCHISE APPLICANTS. USFS agrees
to present to each Applicant for a Microtel motel franchise "Franchisee"),
PCC's then available financing programs for providing financing for the
acquisition of the Franchise Property and/or construction of a Microtel motel
(herein "PCC Loans" or the "Loans" and the Note issued in connection therewith
referred to as the "PCC Note").
1.2. APPLICATIONS FOR PCC LOANS. USFS and PCC must both agree in
writing that an application for a loan by any Franchisee shall be covered by
this Agreement. All applications for PCC Loans ("Loan Applications") shall be
presented on forms provided by PCC and shall contain such information and data
as PCC may from time to time require in connection with its review and approval
of Loan Applications from Franchisees.
1.3. ACCEPTANCE OR REJECTION OF A LOAN.
(a) PCC agrees to accept or reject each Loan Application
within five (5) business days after actual receipt (exclusive of
<PAGE> 3
the date of receipt) of a fully complete and documented Loan Application
package in form and substance satisfactory to PCC. Any completed Loan
Application which has not been accepted by PCC within five (5) business days
after the date of receipt of a complete Loan Application shall be deemed to
have been rejected. A determination of the completeness of a Loan Application
made by PCC in good faith shall be final and binding on all concerned parties.
(b) USFS and PCC acknowledge and agree that PCC shall
have and retain the sole authority, discretion, and responsibility to approve
or disapprove any Loan Application and to establish the terms, provisions and
conditions, including collateral requirements and the terms and conditions of
any and all personal or corporate guarantees, on all PCC Loans and Loan
Applications submitted or processed under this Agreement.
1.4. LOAN APPROVAL PROCESS. PCC, at its cost and expense, shall
perform such due diligence and conduct such verification of information and
data pertaining to an applicant Franchisee, including verification of
information and data provided by the Franchisee, Franchisee's representatives
and third-party sources (such as Franchisee's accountants, credit bureaus,
appraisers, environmental consultants, etc.) as PCC shall deem appropriate.
USFS shall not participate in the underwriting or approval of any Loan
Application submitted to PCC. It is understood and agreed that PCC shall have
and will exercise sole and absolute discretion and authority in approving or
rejecting any Loan Application and establishing all terms, provisions, and
conditions of any Loan approved by PCC. With respect to each approved
Franchisee PCC will provide USFS copies of documents and instruments related to
the PMC Loan, as directed by the maker of such Loan; excluding, however, PCC's
work product and proprietary information.
1.5. LOAN APPROVAL AND CLOSING. Upon approval of a Loan
Application, PCC will notify Franchisee and USFS of its acceptance and the
terms and conditions under which the Loan will be made. Thereafter, PCC will
use reasonable business efforts to complete the origination, processing,
closing and disbursement of the PCC Loan.
1.6. PCC AS HOLDER OF LOAN DOCUMENTS. When the PCC Loan has been
closed in accordance with the terms and conditions of the Loan commitment
issued by PCC, PCC will disburse the proceeds of such PCC Loan to or on behalf
of the Franchisee, whereupon PCC shall become the holder of the Franchisee's
promissory note and all other loan documents associated with the PCC Loan (the
"Loan Documents").
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<PAGE> 4
1.7. SERVICING, MONITORING AND LIQUIDATION OF LOANS. PCC will be
responsible for collecting and receiving all installments of principal and
interest, escrow payments and other payments made on any PCC Loan. Except as
otherwise specifically provided or modified by the terms and provisions of this
Agreement, all servicing, monitoring and liquidation functions shall be the
responsibility of PCC, and PCC shall have and may exercise sole and absolute
discretion and authority in carrying out such functions.
1.8. ACTIONS BY PCC. PCC, and each of its agents and employees, is
authorized to accept and act upon any documents, information or data provided
by or on behalf of an applicant Franchisee which it in good faith believes to
be genuine, true or correct, without independent verification, and shall not be
liable for any error of judgment or for any act done or omitted by it in good
faith in connection with underwriting review, approval, rejection, closing,
administration or servicing of a PCC Loan for a Franchisee, unless the same is
occasioned by the willful misconduct or gross negligence of PCC or its
employees or agents.
SECTION 2. COMPENSATION FOR MARKETING SERVICES:
2.1. COMPENSATION FOR MARKETING SERVICES.
(a) As full compensation for all marketing services
rendered by USFS pursuant to this Agreement, PCC shall credit to the Reserve
Account (as hereinafter defined) an amount equal to three-eighths (3/8%)
percent per year (the "Marketing Fee") times the average principal balances of
outstanding and performing PCC Loans originated under this Agreement,
calculated as of the end of each calendar quarter (March, June, September and
December) based upon the average principal balances of such outstanding and
performing Loans during the immediate preceding three month period; provided,
however, that the Marketing Fee shall be reduced by one-half to
three-sixteenths (3/16%) percent per year to the extent that transactions (both
performing and non-performing loans) originated under this Agreement exceed, on
the date the amount of such Marketing Fee is to be calculated, seventy (70%)
percent of the net proceeds from the stock offering referred to in Section 7
hereof.
(b) The Marketing Fee shall apply only to the principal
balances of PCC Loans which are outstanding and not in monetary default by the
original borrower/maker (the "Borrower") at the end of each calendar quarter
for which the Marketing Fee calculation is made.
(c) The amount of the Marketing Fee due USFS shall be
calculated and credited to the Reserve Account within fifteen (15)
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<PAGE> 5
days after the end of each calendar quarter and PCC shall promptly thereafter
provide USFS a report showing the calculation of the Marketing Fee for the
quarter. The excess, if any, of the funds held in the Segregated Reserve
Account (as hereinafter defined) over the Required Reserve Amount (as hereafter
defined) resulting from crediting the amount of the Marketing Fee to the
Reserve Account shall be paid to USFS quarterly, within thirty (30) days after
the quarter-end, and will be transmitted to USFS together with the quarterly
report containing the calculation of the Marketing Fee.
SECTION 3. LOAN FUNDS AND RESERVE ACCOUNT:
3.1. RESERVE ACCOUNT
(a) Upon the date that the first loan commitment is
issued by PCC to a Franchisee under this Agreement, USFS shall deposit the sum
of One Hundred Thousand ($100,000) Dollars with PCC, which, together with the
Marketing Fees credited thereto quarterly and the additions to be made by USFS
as hereinafter provided, will be held by and under the control of PCC in a
Reserve Account (herein the "Reserve Account") to secure payment and
performance of the PCC Loans and pay any losses suffered by PCC on
non-performing and/or foreclosed Loans.
(b) From and after such time as the principal amount
outstanding (after giving effect to principal repayments) on all PCC Loans plus
the total undisbursed principal amount of all Loans on which PCC has commenced
any funding (herein such cumulative amount is referred to as the "Proforma
Principal Amount") equals or exceeds Five Million ($5,000,000) Dollars, USFS
shall deposit with PCC, within five (5) days following the date the first
advance is made by PCC on a Loan, an amount equal to two (2%) percent of the
Proforma Principal Amount of each such Loan. Such deposit amounts shall be
held, applied and/or disbursed as a part of the Reserve Account.
(c) All Marketing Fees earned by USFS will be credited to
the Reserve Account and held, applied and/or disbursed by PCC as provided in
this Agreement, until such time (determined on a calendar quarter basis) as the
Reserve Account balance equals or exceeds the Required Reserve Amount (as
hereinafter defined in paragraph 3.3), at which time and during the continuance
thereof the excess, if any, will be remitted to USFS as provided in paragraph
3.3 of this Agreement.
3.2. SEGREGATED RESERVE ACCOUNT.
(a) The funds paid or credited to the Reserve Account
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<PAGE> 6
will be placed by PCC in a Segregated Reserve Account (the "SRA") which may be
invested by PCC in eligible instruments or accounts (the "Eligible
Investments") identified in Exhibit "A" hereto.
(b) All income earned from Eligible Investments shall be
credited to the Reserve Account quarterly and the report provided by PCC to
USFS on a quarterly basis will reflect income earned on the SRA balance through
reported quarter.
3.3. REQUIRED RESERVE AMOUNT; PAYMENTS OF EXCESS TO USFS. USFS and
PCC agree that the term "Required Reserve Amount" shall mean the greater of (i)
One Hundred Thousand ($100,000) Dollars, or (ii) an amount found by multiplying
two (2%) percent times the Proforma Principal Amount on performing and
non-performing Loans originated pursuant to this Agreement, excepting only
those PCC Loans covered by the provisions of Section 3.4 hereof. In the event
and to the extent that the balance of the SRA, after deducting therefrom (i)
accrued and unpaid interest on non-performing Loans and (ii) actual costs and
expenses incurred in connection with non-performing Loans exceeds the Required
Reserve Amount as of the end of a calendar quarter, such excess amount shall be
remitted by PCC to USFS within thirty (30) days following the end of the
quarter for which the calculation is made.
3.4. TRANSACTIONS EXCLUDED FROM RESERVE REQUIREMENTS. USFS and PCC
agree that the two (2%) percent reserve deposit required from USFS for PCC
Loans shall be waived with respect to transactions with verifiable loan to
value (LTV) ratios of seventy (70%) percent or less [i.e. with thirty (30%)
percent or more equity invested]. USFS agrees that the LTV calculation shall
be based upon the lesser of (i) actual verifiable cost, or (ii) appraised value
as determined by a qualified appraiser approved by PCC. Notwithstanding the
above waiver of the reserve deposit requirements for transactions with LTV
ratios of seventy (70%) percent or less, USFS and PCC agree that all other
terms and provisions of this Agreement shall apply to such transactions,
including without limitation the provisions of Section 2 applicable to
Marketing Fees and Section 4 relating the availability of the Reserve Account
to cover any losses incurred in connection with such Loans.
3.5. DEFICIENCY IN RESERVE ACCOUNT. If losses, costs and expenses
resulting from defaults by Franchisees on PCC Loans at any time exceed the
funds available in the Reserve Account for the payment of such losses, costs
and expenses, all Marketing Fees and deposits made pursuant to paragraph 3.2(b)
shall be retained by or paid to PCC until such time as any deficiency in the
Reserve Account shall be paid in full before any such amounts shall be
deposited in or credited to the Reserve Account, including the SRA.
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<PAGE> 7
SECTION 4. NON-PERFORMING LOANS; REMARKETING:
4.1. DEFAULT ON PCC LOAN BY FRANCHISEE.
(a) In the event that a Franchisee defaults under its
Loan and/or the Loan Documents and PCC forecloses, accepts a reconveyance in
lieu of foreclose, or otherwise takes possession of the Franchise Facility, PCC
shall notify USFS and USFS shall:
(i) From and after the earlier of the date PCC
forecloses or the date PCC receives
possession of a Franchise Facility, pay to
PCC monthly from NOI (as hereinafter defined)
generated by the facility, with any
deficiency made-up by USFS, within ten (10)
days after the end of each calendar month,
the installments of principal and interest
(based upon the principal installments and
interest rate contained in the PCC Note) and
other amounts provided in the Loan Documents;
(ii) Promptly begin and utilize reasonable
commercial efforts to remarket the Franchise
Facility of the defaulting Franchisee;
(iii) Operate and maintain, or cause the Franchise
Facility to be operated and maintained by an
affiliate of USFS, in ordinary course of
business; and
(iv) Observe and comply with Franchisee's
obligations under the Loan Documents to
maintain insurance on and with respect to the
Franchise Facility. The insurance required
to be maintained by USFS must be available on
commercially reasonable terms and shall
include policies of fire and extended
coverage and general public liability
insurance and be in such amounts, with such
coverages as are usual and customary in the
industry for properties of a size and type
substantially similar to the Franchise
Facility of the defaulting Franchisee. PCC
shall be named an additional insured,
mortgagee and/or loss payee, as its interest
shall appear, on all such insurance policies.
(b) The obligations of USFS provided in paragraph 4.1(a)
above and rights to remarket the Franchise Facility shall continue
- 6 -
<PAGE> 8
for a period not to exceed twelve (12) months following earlier of the date PCC
forecloses or the date PCC receives possession of the Franchise Facility, or
such later date as USFS and PCC shall agree in writing. Any resale or
remarketing of a Franchise Facility by or at direction of USFS shall be subject
to the prior approval of PCC, which approval will not be unreasonably withheld.
4.2. REMARKETING AND SALE OF FRANCHISE FACILITY.
(a) Upon any resale or remarketing of a Franchise
Facility by USFS directly, or by or through a Franchisee or others at the
direction or under the control of USFS, pursuant to Section 4.1(a)(ii) of this
Agreement, PCC shall automatically and immediately receive from the proceeds of
the sale the following amounts, and the excess, if any, received by PCC from
the sale, shall, subject to satisfaction of the conditions of Paragraph 4.2(c),
be placed in the Reserve Account:
(i) The principal balance of the Loan outstanding
at the date of sale;
(ii) All accrued and unpaid interest through the
date of sale;
(iii) All legal fees and collection costs paid or
incurred by PCC since the default by the
Franchisee and through the date of sale; and
(iv) All other costs and expenses incurred or paid
by PCC under or pursuant to the PCC Note and
Loan Documents, including, without
limitation, any and all amounts advanced or
paid for insurance, taxes, etc. with respect
to the Franchise Facility.
(b) In the event the proceeds from the sale of the
Franchise Facility are insufficient to pay or reimburse PCC the total of all
amounts provided in Subsections 4.2(a)(i) through (iv) [herein the amount of
such insufficiency is referred to as the "Deficiency on Resale"], PCC shall
have the right to immediately withdraw from the Reserve Account an amount
sufficient to satisfy in full the Deficiency on Resale.
(c) Provided that USFS has (i) closed the sale of the
Franchise Facility of a defaulting Franchisee within twelve (12) months after
the earlier date that PCC forecloses or receives possession thereof, (ii) has
timely made the payments required by Section 4.1(a) of this Agreement, and
(iii) the amounts provided in Subsection 4.2(a)(i) through (iv) above are
received by PCC at the
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<PAGE> 9
time of sale, USFS shall be entitled to have immediately credited to the
Reserve Account all excess proceeds resulting from USFS's resale or remarketing
of a Franchise Facility.
4.3. COOPERATION BY PCC. USFS and PCC acknowledge that for USFS to
operate and remarket or resale a Franchise Facility, as contemplated in
paragraph 4.1(a) hereof, will require that PCC foreclose or otherwise take
possession of the Franchise Facility pursuant to the Loan Documents. PCC
agrees to cooperate with USFS in its efforts to remarket or sale and/or operate
the Franchise Facility of a defaulting Franchisee, and will, subject to laws of
the applicable jurisdiction, take such action as USFS may reasonably request to
foreclose upon or otherwise secure possession of such Franchise Facility, and
thereafter permit USFS, or its affiliate, to operate and maintain the Franchise
Facility for the period and, as anticipated by Section 4.1 and as may be
permitted by the Loan Documents and subject to any applicable laws; provided,
however, that USFS shall be responsible for and pay or reimburse PCC out of the
proceeds of the sale of such Franchise Facility or from the Reserve Account all
reasonable out-of-pocket costs and expenses incurred or paid in connection with
any such action or proceeding undertaken by PCC at the request of USFS.
4.4. NO THIRD-PARTY BENEFICIARIES. The provisions of Section 4 of
this Agreement, are for the exclusive benefit of USFS, its successors, assigns
and affiliates, and PCC, its successors, assigns and affiliates (including any
holder of the PCC Note and Loan Documents) and no other person or entity,
including any defaulting Franchisee, shall be entitled to rely upon or to
enforce, in whole or part, any provisions or covenants contained in Section 4
of this Agreement or to any credit or reduction in amounts due or owing under
any PCC Loan as a result of any receipts by PCC from any source, including
payments made by USFS or any amounts paid to PCC from the Reserve Account.
SECTION 5. DEFAULTS AND REMEDIES.
(a) Each of the following shall constitute an Event of
Default under this Agreement:
(i) Default by USFS in the payment to PCC of any
amount provided under Subsections 4.1(a)(i)
or failure by USFS to pay for the insurance
required by 4.1(a)(iv) of the Agreement, when
and as due, which default remains uncured for
a period of thirty (30) days following
written notice from PCC; or
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<PAGE> 10
(ii) Failure of USFS to make any payment to the
Reserve Account required by Section 3.1 of
this Agreement, when and as due, which
failure remains uncured for a period of ten
(10) days following the due date; or
(iii) Failure of USFS to begin and use reasonable
commercial efforts in remarketing of a
Franchise Facility as provided in Subsection
4.1(a)(ii), or the failure of USFS to perform
or comply with the provisions of Subsection
4.1(a)(iii) and any such failure continues
uncured for a period of thirty (30) days
following written notice from PCC; or
(iv) USFS shall (A) become insolvent, (B) make an
assignment for the benefit of creditors, (C)
call a meeting of creditors for the
composition of debts, or (D) there shall be
filed by or against USFS a petition in
bankruptcy or for reorganization (whether
under the Bankruptcy Code of 1978 or other
federal or state bankruptcy or insolvency
law), which filing is not dismissed within
thirty (30) days, or (E) a custodian,
receiver or agent is appointed or authorized
to take charge of any of the properties of
USFS; or
(v) USFS shall voluntarily abandon its business
operations.
(b) Upon the occurrence of an Event of Default under
Section 5(a) of this Agreement, PCC may, at its election and in its discretion,
exercise any one or more of the following rights and remedies, each of which
shall be cumulative and nonexclusive, and may be exercised concurrently or
consecutively:
(i) Upon any default by USFS under Subsections
5(a)(i) or (ii), declare all monetary
obligations of USFS under Sections 3.1 and
4.1 to be immediately due and payable,
whereupon, all such monetary obligations
shall automatically be and become immediately
due and payable, without further notice or
demand and PCC shall have the right, at its
option, to proceed forthwith to collect the
total amount due from USFS and concurrently,
proceed as provided in Subsection 5(b)(iii)
hereof;
- 9 -
<PAGE> 11
(ii) Upon any default by USFS under Subsection 5(a)(iii),
terminate the right of USFS to operate and/or
remarket or resell a Franchise Facility, and
thereafter proceed with the remarketing or sale of
the Franchise Facility and concurrently withdraw
funds held in the Reserve Account to pay and satisfy
installments and other amounts due and coming due
under the defaulted PCC Loan and related Loan
Documents and to reimburse or pay all costs and
expenses paid or incurred by PCC in connection with
remarketing and/or sale of the Franchise Facility;
provided, however, that USFS shall remain liable to
PCC for the deficiency, if any, between the net
operating income ("NOI") of the Franchise Facility
received by PCC and principal and interest
installments due PCC (based upon the interest rate
contained in the PCC Note) for the twelve (12) months
period following the date PCC forecloses or receives
possession of such Franchise Facility, whichever is
earlier; or
(iii) Upon any sale or disposition of a Franchise Facility
by PCC in connection with a default by a Franchisee
and while USFS is in default of the covenants and
conditions in this Agreement with respect to such
Franchise Facility, PCC may apply any part or all of
the Reserve Account, as appropriate, to pay and
satisfy any deficiency remaining under the PCC Note
and Loan Documents after the said sale of the
Franchise Facility; or
(iv) If an Event of Default under Subsections 5(a)(i),
(ii), (iv) or (v) has occurred and is continuing, PCC
may, at its election and without further notice or
demand to USFS, immediately terminate this Agreement
as to all future liabilities or obligations of PCC
[other than the indemnification obligation of PCC
under Section 9.4(b)] and all rights of USFS
hereunder, and thereupon, all monies due or coming
due to USFS pursuant to this Agreement, whether as
Marketing Fees or otherwise, together with all funds
in the Reserve Account (including funds on deposit in
the SRA) and any interest therein, shall be and
automatically become the property of PCC
- 10 -
<PAGE> 12
and shall be retained by PCC, as partial liquidating damages. USFS
shall and does hereby agree to waive and release any interest in or
claim or right to any such funds or the Reserve Account upon the
occurrence of an Event of Default and termination by PCC as provided
in this paragraph. USFS shall remain liable an shall pay, on demand,
all amounts owing to PCC pursuant to Section 3.1, plus the deficiency,
if any, between the NOI of defaulted Franchise Facilities received by
PCC for the twelve (12) month period following the earlier date that
PCC forecloses or the date PCC receives possession of each defaulted
Franchise Facility and the principal and interest installments due PCC
on defaulted Loans pursuant to Subsection 4.1(a)(i) of this Agreement.
(c) Notwithstanding, any provision in this Agreement to
the contrary or in conflict, upon the occurrence of an Event of Default by USFS
as provided in Section 5 and the sale of a Franchise Facility by PCC, all
excess proceeds received from any such sale, to the extent not required to be
paid to the original Borrower or maker of the PCC Note, shall be and become the
property of PCC without any requirement to account to USFS for such surplus
from the sale.
SECTION 6. TERM AND TERMINATION:
6.1. TERM.
(a) This Agreement shall become effective upon the date
of full execution by the parties hereto (the "Effective Date") as reflected in
Section 9.13 and shall continue until the earlier to occur of:
(i) The date of cancellation by either party upon
giving thirty (30) days prior written notice
from one party to the other; or
(ii) The date of termination by PCC as provided
in Section 5 of this Agreement.
(b) A cancellation of this Agreement pursuant to
subparagraph 6.1(a)(i) shall not terminate the obligations of either party with
respect to all transactions which are or have been:
- 11 -
<PAGE> 13
(i) Funded;
(ii) Closed; or
(iii) Committed (i.e. any transaction which has
been approved by the Credit Committee of
PCC).
6.2. DISPOSITION OF MARKETING FEES AND RESERVE ACCOUNT UPON EARLY
CANCELLATION/TERMINATION OF AGREEMENT. Notwithstanding any provision herein to
the contrary or in conflict, USFS and PCC agree that in the event this
Agreement is canceled by USFS pursuant to subparagraph 6.1(a)(i) within six (6)
months following the Effective Date and prior to the Public Offering by PCC, or
by PCC pursuant to Subsection 5(b)(iv) as a result of the occurrence of an
Event of Default, all monies due or coming due to USFS hereunder as Marketing
Fees or otherwise, and funds in the Reserve Account (including funds on deposit
in the SRA) and any interest therein, shall be retained by PCC as partial
liquidating damages, free and clear of any obligations or restrictions under
this Agreement, and USFS hereby waives and releases any rights or claims to or
interest in any such funds or the Reserve Account in the event of any such
cancellation or termination of this Agreement.
SECTION 7. PUBLIC STOCK OFFERING; USFS FINANCIAL INFORMATION:
7.1. PUBLIC OFFERING.
(a) USFS acknowledges that PCC may, at its option and on
a best efforts basis, initiate a public offering of PCC shares (the "Public
Offering") in conjunction with this Agreement. The terms, provisions,
conditions and scheduling of the Public Offering shall be under the exclusive
control and within the absolute discretion of PCC, as shall be the decision on
whether or not to proceed with a Public Offering. The costs and expenses
connected with such Public Offering shall be the responsibility of PCC.
(b) USFS hereby agrees to assist PCC in connection with
any such Public Offering as reasonably requested by the underwriter selected by
PCC for the Public Offering. Any cost or expense of assisting with the Public
Offering which is incurred by USFS at the request of PCC or its underwriter
will be reimbursed by PCC; provided, however, that USFS and PCC will agree on
the amount and/or type of costs and expenses to be reimbursed prior to USFS's
incurring the same.
7.2. USFS FINANCIAL INFORMATION.
(a) USFS shall provide PCC annually, within ninety (90)
days following the end of each fiscal year of USFS, with the
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<PAGE> 14
consolidated balance sheet of USFS as at the end of such fiscal year and the
related consolidated statements of income, shareholders' equity and cash flow
of USFS for such fiscal year, prepared in accordance with generally accepted
accounting principals, and audited by the independent certified public
accountants employed by USFS (the "Financial Information").
(b) Within thirty (30) days after preparation thereof,
USFS shall provide PCC a copy of each Uniform Franchise Offering Circular
("UFOC's") pertaining to Microtel.
(c) PCC will use its best efforts to maintain, in
confidence, Financial Information provided by USFS to PCC and marked as
"Confidential." Such Financial Information will be revealed only to such of
PCC's agents and employees as may reasonably be required to evaluate the
ongoing business of USFS. Such agents and employees will be advised of the
restrictions on further disclosure. USFS acknowledges that PCC may be required
by law or order of a court to disclose or provide such confidential Financial
Information to third-persons. In the event that PCC is served with any
subpoena, request for production or order of a court or administrative tribunal
pertaining to such confidential Financial Information, it will notify USFS, and
USFS may, at USFS's cost and expense, object to or defend against any such
subpoena, discovery request or order.
SECTION 8. PCC ACTION WITH RESPECT TO PCC LOANS:
8.1. MODIFICATION OF LOANS, ETC. If PCC shall at any time or from
time to time, with or without the consent of, or notice to, USFS:
(a) change or extend the manner, place or terms of
payment of, or renew or alter all or any portion of, a PCC Loan or Loan
Documents;
(b) take any action under or in respect of a PCC Loan or
Loan Documents in the exercise of any remedy, power or privilege contained
therein or available to it at law, equity or otherwise, or waive or refrain
from exercising any such remedies, powers or privileges;
(c) amend or modify, in any manner whatsoever, a PCC Loan
or Loan Documents;
(d) extend or waive the time for any Borrowers' or other
person's (including, without limitation, any guarantor) performance of, or
compliance with, any term, covenant or agreement on its part to be performed or
observed with respect to a PCC Loan or under
- 13 -
<PAGE> 15
Loan Documents, or waive such performance or compliance or consent to a failure
of, or departure from, such performance or compliance;
(e) take and hold security or collateral for the payment
of a PCC Loan or sell, exchange, release, dispose of, or otherwise deal with,
any property pledged, mortgaged or conveyed, or in which PCC, as Lender, has
been granted a Lien, to secure any indebtedness of any of the Borrowers, or any
other person (including, without limitation, any guarantor) of a PCC Loan;
(f) release anyone who may be liable in any manner for
the payment of any amounts owed by any of the Borrowers, or any other person
(including, without limitation, any guarantor) of a PCC Loan;
(g) modify or terminate the terms of any intercreditor or
subordination agreement pursuant to which claims of other creditors of any of
the Borrowers, or any other person (including, without limitation, any
guarantor) of a PCC Loan are subordinated to the claims of PCC; or
(h) apply any sums by whomever paid or however realized
to any amounts owing by any of the Borrowers or any other person (including,
without limitation, any guarantor) of a PCC Loan in such manner as PCC shall
determine in its discretion;
then PCC shall not incur any liability to USFS as a result thereof, and no such
action shall impair or release any of the obligations of USFS under this
Agreement.
8.2. SURVIVAL OF AGREEMENT. USFS agrees that this Agreement shall
remain in full force and effect, and its obligations hereunder shall continue
with respect to each PCC Loan made subject to this Agreement, irrespective of,
and unaffected by:
(a) the genuiness, validity, regularity, enforceability
or any future amendment of, or change in, any such PCC Loan or any other Loan
Document related thereto or any other agreement, document or instrument to
which any of the Borrowers or any guarantor of the said PCC Loan is or may
become a party;
(b) the absence of any action to enforce the PCC Loan or
any other Loan Document or the waiver or consent by PCC with respect to any of
the provisions of any Loan Document;
(c) the existence, value or condition of, or failure to
perfect a lien against, any security for the PCC Loan or any action, or the
absence of any action, by PCC in respect of such security;
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<PAGE> 16
(d) any change in the time, manner or place of payment
of, or in any other term of, all or any part of the PCC Loan, or any other
amendment or waiver of or any consent to departure from any agreement, note or
other instrument related to such PCC Loan or Loan Documents;
(e) any exchange, release or non-perfection of any
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the PCC Loans; or
(f) any other action or circumstance which might
otherwise constitute a legal or equitable discharge or defense of any Borrower
or a surety or guarantor;
it being agreed by USFS that its obligations under this Agreement shall not be
discharged until the payment and performance, in full, of each said PCC Loan.
USFS expressly waives any rights it may now or in the future have under this
Agreement, any statute, or at common law, or at law or in equity, or otherwise,
to compel PCC to proceed with respect to a PCC Loan against any of the
Borrowers or any other party to such PCC Loan or the Loan Documents, or against
any security for the payment and performance of the PCC Loan before proceeding
against, or as a condition to proceeding under this Agreement. USFS further
expressly waives and agrees not to assert or take advantage of any defense
based upon the failure of PCC to commence an action in respect of any PCC Loan
against any of the Borrowers, or any other person (including, without
limitation, any guarantor) or any security for the payment and performance of a
PCC Loan. USFS agrees that any notice or directive given at any time to PCC
which is inconsistent with the waivers in the preceding two sentences shall be
null and void and may be ignored by PCC, and, in addition, may not be pleaded
or introduced as evidence in any litigation relating to this Agreement for the
reason that such pleading or introduction would be at variance with the written
terms of this Agreement, unless PCC has specifically agreed otherwise in
writing. The foregoing waivers are of the essence of the transaction
contemplated by this Agreement and, but for this Agreement and such waivers,
PCC would decline to make PCC Loans to Franchisees.
8.3. WAIVERS WITH RESPECT TO PCC LOANS. In addition to the waivers
contained elsewhere in this Agreement, USFS waives, and agrees that it shall
not at any time insist upon, plead or in any manner whatever claim or take the
benefit or advantage of, any appraisal, valuation, stay, extension, marshalling
of assets or redemption laws, or exemption, whether now or at any time
hereafter in force, which may delay, prevent or otherwise affect the
performance by USFS of its obligations under, or the enforcement by PCC of,
this Agreement. USFS further hereby waives diligence,
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<PAGE> 17
presentment and demand (whether for non-payment or protest or of acceptance,
maturity, extension of time, change in nature or form respecting PCC Loans,
acceptance of further security, release of further security, composition or
agreement arrived at as to the amount of, or the terms of, PCC Loans, notice of
adverse change in any of the Borrowers' or any other person's (including,
without limitation, any guarantor) financial condition or any other fact which
might materially increase the risk with respect to a PCC Loan) with respect to
any of the PCC Loans or all other demands whatsoever and waives the benefit of
all provisions of law which are or might be in conflict with the terms of this
Agreement.
SECTION 9. MISCELLANEOUS:
9.1. NOTICES.
(a) Unless otherwise provided herein, communications
provided for hereunder shall be in writing and shall be mailed, telecopied or
delivered, as follows:
If to USFS: U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attn: Neal Aronson
Telecopier No. (404) 321-4482
or, an affiliate of USFS designated by USFS by notice in writing to PCC, at the
address shown in such notice.
If to PCC: PMC COMMERCIAL TRUST
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Attn: Jan S. Salit
Telecopier No. (214) 380-1371
or, as to each party, at such other address as shall be designated by such
party in a written notice to the other parties. All such notices and other
communications to a party shall be effective (i) if mailed, when received or
three days after mailing, whichever is earlier; (ii) if telecopied, when
transmitted; or (iii) if hand delivered, when delivered. All notices given by
telephone shall be subsequently confirmed in writing, such written confirmation
to be controlling over any information in the telephonic notice. Personal
delivery or delivery by transmittal of a confirmed telecopy sent to the
telecopier number following a party's address herein, to a party or to any
officer, partner, agent, or employee of such party at said address or
telecopier number shall constitute receipt. Rejection or other refusal to
accept or inability to deliver because of a changed address of which no notice
has been
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<PAGE> 18
received shall also constitute receipt.
9.2. EXPENSES. USFS and PCC hereby agree to share equally the
legal cost of the preparation of this Agreement.
9.3. AMENDMENTS. Any term, covenant, agreement or condition of
this Agreement may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by PCC and, in the case of an amendment, by
each USFS and PCC.
9.4. GENERAL INDEMNIFICATION.
(a) USFS agrees to indemnify and hold PCC, its directors,
officers, shareholders, employees, agents and affiliates harmless from and
against any claim, loss, damage, action, cause of action, liability, cost and
expense (including, without limitation, reasonable attorney's fees and
expenses) or suit of any kind or nature whatsoever (collectively "Losses")
brought against or incurred by PCC, including without limitation, claims
brought against PCC by any third party, in any manner arising out of or,
directly or indirectly, related to or connected with USFS' business activities
related to this agreement.
(b) PCC agrees to indemnify and hold USFS, its directors,
officers, shareholders, employees, agents and affiliates harmless from and
against any Losses brought against or incurred by any of the foregoing persons,
in any manner arising out of or, directly or indirectly, related to or
connected with PCC's business activities related to this agreement or the
Public Offering.
9.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
9.6. INTEGRATION. THIS AGREEMENT SETS FORTH AND CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE TRANSACTIONS
SET FORTH HEREIN.
9.7. SETOFF. In addition to any rights now or hereafter granted
under Applicable law and not by way of limitation of any such rights, PCC is
hereby authorized by USFS, at any time or from time to time after the
occurrence of an Event of Default, without notice or demand, any such notice
being hereby expressly waived, to set off and to appropriate and to apply any
and all deposits (general or special, and including, but not limited to,
Marketing Fees or other deposit, whether matured or unmatured) and any other
indebtedness at any time held or owing by the PCC to or for the credit or the
account of USFS against and on account of any monetary obligation of USFS to
PCC under this Agreement or any damages suffered by PCC as a result of the
failure of USFS to keep
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<PAGE> 19
and perform all terms, provisions and conditions of this Agreement,
irrespective of whether or not any or all of such monetary obligations and
damages shall have been declared to be due and payable.
9.8. ASSIGNMENT. All the provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that USFS may not assign or transfer
any of its rights under this Agreement without PCC's prior written consent.
9.9. TITLES AND CAPTIONS. Titles and captions of Sections,
Subsections and paragraphs in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement.
9.10. SEVERABILITY OF PROVISIONS. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remainder of such provision or the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
9.11. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original but all of which
together, when taken together, shall constitute one and the same instrument.
9.12. PARTICIPATIONS.
(a) PCC may at any time sell, assign, transfer,
negotiate, and grant participations in, or otherwise dispose of, all or any
portion of its rights, benefits and/or obligations under this Agreement and
under any PCC Loan and related Loan Documents to any Person and in the event of
any such disposition by PCC, all references herein to PCC shall be deemed a
reference to PCC's transferee or participant to the extent of its
participation. USFS hereby agrees that any transferee or participant receiving
or purchasing a participation in a PCC Loan and related Loan Documents or
rights under this Agreement shall be entitled to the rights and benefits of
this Agreement to the extent of any such participation or assignment, as if
such transferee or participant were PCC, provided, however, that all such
rights and benefits shall be exercisable only by and through PCC.
(b) Notwithstanding any provision or condition herein to
the contrary or in conflict, USFS hereby acknowledges and agrees that PCC may
negotiate, sell, assign or transfer all or any part of
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<PAGE> 20
a PCC Loan and related Loan Documents free and clear of any claims by USFS
under this Agreement, provided that all obligations of USFS under this
Agreement with respect to such PCC Loan and related Loan Documents shall
automatically terminate upon any such negotiation, sale, assignment of
transfer.
9.13. EFFECTIVE DATE. The "Effective Date" of this Agreement shall
be the __ day of April, 1996.
IN WITNESS WHEREOF, the undersigned have caused their respective
signatures to be affixed hereto by their officers thereunto duly authorized on
this ___ day of April, 1996.
USFS:
U.S. FRANCHISE SYSTEMS, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
[CORPORATE SEAL]
PCC:
PMC COMMERCIAL TRUST
BY:
-----------------------------------
TITLE:
--------------------------------
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<PAGE> 21
EXHIBIT "A"
ELIGIBLE INVESTMENTS
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<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 1 to the Registration Statement on
Form S-11 (File No. 333-2757) of our report dated March 20, 1996, on our audits
of the financial statements of PMC Commercial Trust. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 7, 1996
<PAGE> 1
EXHIBIT 24
The undersigned trust managers 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 the
Registration Statement and to file the same, with all exhibits thereto and
other documents in connection therewith 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.
NAME TITLE DATE
---- ----- ----
/s/ DR. MARTHA R. GREENBERG Trust Manager June 7, 1996
- ------------------------------
Dr. Martha R. Greenberg
/s/ DR. IRA SILVER Trust Manager June 7, 1996
- ------------------------------
Dr. Ira Silver
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 FORM 10Q OF PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 173,946
<SECURITIES> 16,830,812
<RECEIVABLES> 63,341,691<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 83,165,479<F2>
<CURRENT-LIABILITIES> 4,664,510<F3>
<BONDS> 29,500,000
<COMMON> 49,144,887
0
0
<OTHER-SE> (143,918)
<TOTAL-LIABILITY-AND-EQUITY> 83,165,479
<SALES> 0
<TOTAL-REVENUES> 1,906,786
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 310,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251,769
<INCOME-PRETAX> 1,344,470
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,344,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,344,470
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<FN>
<F1>Includes current and long-term portion of all loans receivable and related
interest receivable
<F2>Includes the following items not included above:
(i) Other assets, net $ 50,000
(ii) Deferred borrowing costs 357,754
(iii) Restricted investments 2,411,276
----------
$2,819,030
==========
<F3>Includes the following:
(i) Dividends payable $1,310,166
(ii) Accounts payable 5,859
(iii) Interest payable 227,921
(iv) Borrower advances 1,106,265
(v) Unearned Commitment fees 816,611
(vi) Due to affiliates 1,043,627
(vii) Unearned construction
monitoring fees 154,061
----------
$4,664,510
==========
</FN>
</TABLE>
