<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22148
-------------------
PMC COMMERCIAL TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-6446078
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17290 Preston Road, 3rd Floor,
Dallas, TX 75252 (972) 380-0044
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of November 1, 1996, Registrant had outstanding 6,021,772 Common Shares of
Beneficial Interest, par value $.01 per share.
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PMC COMMERCIAL TRUST
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income -
Nine Months Ended September 30, 1996 and 1995 3
Three Months Ended September 30, 1996
and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996
and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
PART I
Financial Information
ITEM 1.
Financial Statements
1
<PAGE> 4
PMC COMMERCIAL TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Loans receivable, net .............................................. $ 80,155,358 $ 59,129,536
Cash equivalents ................................................... 36,133,586 173,679
Restricted investments ............................................. 2,502,968 --
------------- -------------
Total investments .................................................... 118,791,912 59,303,215
------------- -------------
Other assets:
Cash ............................................................... 11,803 33,504
Interest receivable ................................................ 484,245 410,073
Deferred borrowing costs ........................................... 397,867 --
Other assets, net .................................................. 91,229 50,483
------------- -------------
Total other assets ................................................... 985,144 494,060
------------- -------------
Total assets ......................................................... $ 119,777,056 $ 59,797,275
============= =============
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable ...................................................... $ 27,847,563 $ 7,920,000
Dividends payable .................................................. 2,307,620 1,518,896
Accounts payable ................................................... 47,128 14,175
Interest payable ................................................... -- 56,267
Borrower advances .................................................. 3,668,640 579,133
Unearned commitment fees ........................................... 1,105,955 599,978
Due to affiliates .................................................. 11,895 844,786
Unearned construction monitoring fees .............................. 189,607 81,008
------------- -------------
Total liabilities .................................................... 35,178,408 11,614,243
------------- -------------
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 5,993,818 and
3,491,716 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively ........................... 59,938 34,917
Additional paid-in capital ......................................... 84,864,849 48,326,337
Cumulative net income .............................................. 12,948,254 8,111,318
Cumulative dividends ............................................... (13,274,393) (8,289,540)
------------- -------------
Total beneficiaries' equity .......................................... 84,598,648 48,183,032
------------- -------------
Total liabilities and beneficiaries' equity .......................... $ 119,777,056 $ 59,797,275
============= =============
Net asset value per share ............................................ $ 14.11 $ 13.80
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 5
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Interest income - loans ...................... $ 5,940,964 $ 3,904,196
Interest and dividends - other investments ... 824,020 324,046
Other income ................................. 306,094 199,718
------------ ------------
Total revenues ................................. 7,071,078 4,427,960
------------ ------------
Expenses:
Advisory and servicing fees, net ............. 799,764 654,666
Legal and accounting fees .................... 39,393 56,125
General and administrative ................... 94,358 89,581
Interest ..................................... 1,300,627 59,439
------------ ------------
Total expenses ................................. 2,234,142 859,811
------------ ------------
Net income ..................................... $ 4,836,936 $ 3,568,149
============ ============
Net income per share ........................... $ 1.12 $ 1.03
============ ============
Weighted average shares outstanding ............ 4,324,154 3,445,660
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Interest income - loans ...................... $ 2,185,996 $ 1,520,418
Interest and dividends - other investments ... 565,252 7,206
Other income ................................. 187,272 64,120
------------ ------------
Total revenues ................................. 2,938,520 1,591,744
------------ ------------
Expenses:
Advisory and servicing fees, net ............. 193,201 280,559
Legal and accounting fees .................... 13,756 8,635
General and administrative ................... 37,798 22,660
Interest ..................................... 515,646 25,147
------------ ------------
Total expenses ................................. 760,401 337,001
------------ ------------
Net income ..................................... $ 2,178,119 $ 1,254,743
============ ============
Net income per share ........................... $ 0.37 $ 0.36
============ ============
Weighted average shares outstanding ............ 5,859,901 3,447,271
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
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PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 4,836,936 $ 3,568,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of:
Discount on purchased loans ................... (21,811) (19,574)
Deferred commitment fees ...................... (410,703) (337,641)
Construction monitoring fees .................. (109,129) (129,938)
Amortization of organization and borrowing costs .. 58,615 6,030
Commitment fees collected ......................... 1,198,275 519,680
Construction monitoring fees collected, net ....... 217,728 27,798
Changes in operating assets and liabilities:
Accrued interest receivable ................... (74,172) (127,209)
Other assets .................................. (46,776) --
Deferred borrowing costs ...................... (450,452) --
Interest payable .............................. (56,267) --
Borrower advances ............................. 3,089,507 (1,188,800)
Due to affiliates ............................. (832,891) 318,485
Accounts payable .............................. 32,953 2,541
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............... 7,431,813 2,639,521
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded .......................................... (26,586,654) (24,879,204)
Principal collected ................................... 5,301,048 4,117,226
Investment in restricted cash ......................... (2,502,968) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................... (23,788,574) (20,761,978)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares .............. 36,996,314 60,541
Proceeds from issuance of notes payable .............. 39,140,770 2,390,000
Payment of dividends ................................. (4,077,280) (3,130,229)
Payment of stock offering costs ...................... (551,630) --
Payment of principal on notes payable ................ (19,213,207) (40,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..... 52,294,967 (719,688)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 35,938,206 (18,842,145)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......... 207,183 18,850,103
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................ $ 36,145,389 $ 7,958
============ ============
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested ................................. $ 118,849 $ 21,759
============ ============
Dividends declared, not paid ......................... $ 2,307,620 $ 1,138,594
============ ============
Interest paid ........................................ $ 1,306,076 $ 30,747
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 8
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of PMC Commercial
Trust ("PMC Commercial") and its subsidiaries (collectively the "Company") as
of and for the three and nine months ended September 30, 1996 and 1995 have not
been audited by independent accountants. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the Company's financial position at September 30, 1996, results
of operations for the three and nine months ended September 30, 1996 and 1995,
and cash flows for the nine months ended September 30, 1996 and 1995. These
adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1995 Annual
Report on Form 10-K.
The results for the nine months ended September 30, 1996, are not
necessarily indicative of future financial results.
NOTE 2. BASIS FOR CONSOLIDATION
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 consolidated financial statements include the
accounts of PMC Commercial, PMC Commercial Corp. and PCR. PMC Commercial owns
100% of PMC Commercial Corp. and directly or indirectly all of the partnership
interests of PCR (see Note 5).
NOTE 3. DIVIDENDS TO BENEFICIARIES
During the three and nine month periods ended September 30, 1996, PMC
Commercial declared dividends to its shareholders of beneficial interest of
$0.385 and $1.135 per share, respectively.
NOTE 4. DUE TO AFFILIATE
Pursuant to an investment management agreement (the "Investment
Management Agreement") between the Company and PMC Advisers, Inc., an
affiliated entity (the "Investment Manager"), the Company incurred fees of
approximately $1.3 million for the nine months ended September 30, 1996. Of
the amount of servicing and advisory fees paid or payable to the Investment
Manager as of September 30, 1996, $219,500 has been offset against commitment
fees as a direct cost of originating loans.
6
<PAGE> 9
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DUE TO AFFILIATE (CONTINUED)
Effective July 1, 1996, the Investment Management Agreement was amended
to include compensation to the Investment Manager for its assistance in the
issuance of the Company's debt and equity securities. Such compensation
includes a consulting fee based on (i) 12.5% of any offering fees (underwriting
or placement fees) incurred by the Company pursuant to the public offering or
private placement of the Company's common shares, and (ii) 50% of any issuance
or placement fees incurred by the Company pursuant to the issuance of the
Company's debt securities or preferred shares of beneficial interest. Pursuant
to the amended Investment Management Agreement, PMC Commercial incurred fees of
$251,000 pursuant to the Investment Management Agreement as a cost of issuing
its common shares (see Note 6), which has been offset against additional paid-in
capital on the accompanying September 30, 1996 consolidated balance sheet.
Pursuant to the amended Investment Management Agreement, the quarterly
servicing and advisory fee (the "Base Fee") is equal to (i) 0.4167% (1.67% on
an annual basis) of the lesser of (a) the average quarterly value of common
equity capital or (b) the average quarterly value of all invested assets and
(ii) 0.21875% (0.875% on an annual basis) of the difference between the average
quarterly value of all invested assets and the average quarterly value of
common equity capital. For purposes of calculating the Base Fee, the average
quarterly value of common equity capital is not increased by the proceeds
received from 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) during the 180 calendar day period immediately following
such public offering. In no event will the aggregate annual fees charged under
the new agreement be greater than that which would have been charged had there
been no revision to the Investment Management Agreement.
NOTE 5. NOTES PAYABLE
On March 12, 1996, the Partnership, a special purpose affiliate of PMC
Commercial, completed a private placement of $29.5 million 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 PMC
Commercial to the Partnership at inception (of which $37.7 million remained
outstanding at September 30, 1996). 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 PMC Commercial in accordance with its
underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to PMC
Commercial or its assets in the event of nonpayment other than the loans
contributed to the Partnership and the restricted investments on the
accompanying consolidated balance sheets. The net proceeds from the 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 PMC Commercial in accordance with its interest in the Partnership. PMC
Commercial used such proceeds to pay down outstanding borrowings under its
revolving credit facility and to make additional loans in accordance with its
underwriting criteria. Approximately $27.9 million remained outstanding under
the Notes at September 30, 1996.
7
<PAGE> 10
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFICIARIES' EQUITY
On July 2, 1996, PMC Commercial completed the sale of 2 million of its
common shares of beneficial interest ("Common Shares") in a public offering and
60,000 Common Shares in a directed public offering (collectively, "the
Offering"). The shares were sold at $15.625 per share, resulting in net
proceeds to PMC Commercial of $30.4 million. In July 1996, PMC Commercial sold
an additional 275,000 Common Shares pursuant to the exercise of the over-
allotment option by the underwriters of the Offering, for additional net
proceeds of approximately $4.1 million. The proceeds of the Offering are being
used to make additional loans in accordance with the Company's underwriting
criteria. The Company incurred approximately $552,000 in costs in connection
with the Offering which were offset against additional paid-in capital on the
accompanying September 30, 1996 consolidated balance sheet.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities."
Those standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered and liabilities
are extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and may only be applied prospectively.
8
<PAGE> 11
PART I
Financial Information
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
PMC Commercial was incorporated in June 1993 and had no operations prior
to completion of its initial public offering (the "IPO") on December 28, 1993.
The net proceeds to the Company from the IPO were $47.7 million, including
over-allotment options.
During the three and nine months ended September 30, 1996, the Company funded
$13 million and $26.6 million, respectively, of loans, all to businesses
operating in the lodging industry. During the years ended December 31, 1995
and 1994, the Company originated and funded or purchased loans with a face
value of $31.7 million and $35.2 million, respectively. As of September 30,
1996, the total portfolio outstanding was $81.5 million ($80.2 million after
reductions for loans purchased at a discount and deferred commitment fees) with
a weighted average contractual interest rate of approximately 11.1%. 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 and are
guaranteed, for all but one loan, by the principals of the businesses financed.
Included in outstanding loans at September 30, 1996 is $2.7 million which was
advanced pursuant to the Small Business Administration Section 504 loan program
(the "SBA 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 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 loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Company's Board of Trust Managers
when significant doubt exists as to the ultimate collectability of one or more
loans. To date, no loss reserves have been established. The determination of
whether significant doubt exists and whether a loss provision is necessary for
each loan requires judgment and consideration of 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
significant loss reserves. At such time as a determination is made that there
exists significant doubt as to the ultimate collectability of one or more loans
requiring the establishment of a loss reserve, the effect to operating results
may be material.
9
<PAGE> 12
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
The net income of the Company during the nine months ended September 30,
1996 and 1995, was $4.8 million and $3.6 million, $1.12 and $1.03 per share,
respectively. The Company's earnings per share during the nine months ended
September 30, 1996 includes the effect of the issuance of 2,335,000 common
shares of beneficial interest issued pursuant to a public offering in July 1996
(the "Offering").
Interest income - loans increased by $2.0 million (51%), from $3.9
million during the nine months ended September 30, 1995, to $5.9 million during
the nine months ended September 30, 1996. This increase was primarily
attributable to: (i) 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 and (ii) portfolio growth from the proceeds
of borrowing arrangements and the Offering in July 1996. The average invested
assets in loans to small businesses increased by $23.8 million (54%), from
$43.7 million during the nine months ended September 30, 1995, to $67.5
million during the nine months ended September 30, 1996. The annualized
average yields on loans for the nine months ended September 30, 1996 and 1995
were approximately 12.1% for both periods. Interest income - loans includes
interest earned on loans, the accretion of discount on purchased loans
(approximately $21,800 and $19,600 during the nine months ended September 30,
1996 and 1995, respectively) and the accretion of deferred commitment fees
(approximately $191,000 and $144,000 during the nine months ended September 30,
1996 and 1995, respectively).
Interest and dividends - other investments increased by $500,000 (154%),
from $324,000 during the nine months ended September 30, 1995, to $824,000
during the nine months ended September 30, 1996. This increase was due to the
increase in funds available for short-term investments. The proceeds from the
IPO were initially invested in government securities and money market funds
until small business loans were funded. The Company completed a structured
financing in March 1996, which resulted in net proceeds of $27.1 million, and
the Offering in July 1996, which resulted in net proceeds of $34.5 million.
These proceeds were initially invested in short-term investments and are being
used to make loans in accordance with the Company's underwriting criteria. The
average short-term investments of the Company increased by $14.5 million
(188%), from $7.7 million during the nine months ended September 30, 1995, to
$22.2 million during the nine months ended September 30, 1996. The average
yields on short-term investments during the nine months ended September 30,
1996 and 1995 were approximately 5.0% and 5.6%, respectively.
Other income increased by $106,000 (53%), from $200,000 during the nine
months ended September 30, 1995, to $306,000 during the nine months ended
September 30, 1996. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment penalties, (iii) late and other loan fees and
(iv) miscellaneous collections. The increase was primarily due to an increase
in the collection of loan-related fees, such as assumption, modification and
extension fees, of $89,000 from $23,000 during the nine months ended September
30, 1995 to $112,000 during the nine months ended September 30, 1996.
Additionally, the income recognized from prepayment penalties increased by
$20,500 from $51,500 during the nine months ended September 30, 1995 to $72,000
during the nine months ended September 30, 1996. These increases were offset
by a decrease in income recognized from the monitoring of hospitality
construction projects in process of $21,000, from $130,000 during the nine
months ended September 30, 1995, to $109,000 during the nine months ended
September 30, 1996.
10
<PAGE> 13
Expenses, other than interest expense, consisted primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to PMC
Commercial'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 direct transaction costs incident to
the acquisition and disposition of investments, corporate legal and auditing
fees and expenses, the fees and expenses of PMC Commercial's independent trust
managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of PMC Commercial'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. Pursuant to the amended Investment Management Agreement, the Company
incurred an aggregate of $1.3 million in management fees for the nine months
ended September 30, 1996, $251,000 of which were incurred as a cost of the
Offering. Of the total management fees paid or payable to the Investment
Manager during the nine months ended September 30, 1996, $219,500 has been
offset against commitment fees as a direct cost of originating loans and the
$251,000 described above has been offset against additional paid-in capital.
Investment management fees were $848,000 for the nine months ended September
30, 1995. Of the total management fees paid or payable to the Investment
Manager during the nine months ended September 30, 1995, $193,000 was offset
against commitment fees as a direct cost of originating loans. The increase in
investment management fees of $452,000 (prior to offsetting direct costs
related to the origination of loans and the issuance of the Company's Common
Shares), or 53 %, is primarily due to: (i) the average quarterly invested
assets (as defined by the Investment Management Agreement), which increased by
$24.2 million, or 47%, from $51.2 million during the quarter ended September
30, 1995, to $75.4 million during the quarter ended September 30, 1996, (ii)
average quarterly total assets (as defined by the Investment Management
Agreement), which increased by $32.7 million, or 62%, from $52.8 million during
the quarter ended September 30, 1995, to $85.5 million during the quarter ended
September 30, 1996, and (iii) average quarterly common equity (as defined by
the Investment Management Agreement), which increased by $3 million, or 6%,
from $47.8 million during the quarter ended September 30, 1995, to $50.8
million during the quarter ended September 30, 1996. All quarterly averages
were calculated pursuant to the Investment Management Agreement.
Legal and accounting fees decreased by $17,000 (30%), from $56,000
during the nine months ended September 30, 1995, to $39,000 during the nine
months ended September 30, 1996. This decrease is attributable to billing of
accounting and corporate legal fees during the nine months ended September 30,
1995.
General and administrative expenses increased by $4,000 (4%), from
$90,000 during the nine months ended September 30, 1995, to $94,000 during the
nine months ended September 30, 1996. This increase is primarily attributable
to an increase in costs related to printing expenses and the Company's
structured financing and revolving credit facility during the nine months ended
September 30, 1996.
Interest expense of approximately $1.3 million during the nine months
ended September 30, 1996 relates primarily to interest on the structured
financing (approximately $1.1 million), interest on the Company's revolving
credit facility (approximately $138,000), the amortization of deferred
borrowing costs (approximately $53,000) and interest incurred on borrower
advances (approximately $24,000). The obligation to pay interest on borrower
advances is included in borrower advances on
11
<PAGE> 14
the accompanying consolidated balance sheets. During the nine months ended
September 30, 1995, interest expense on the Company's revolving credit facility
was approximately $16,000 and interest expense on borrower advances was
$43,000.
As the Company is currently qualified as a Real Estate Investment Trust
("REIT") under the applicable provisions of the Internal Revenue Code of 1986,
as amended ("the Code"), there are no provisions in the financial statements
for Federal income taxes.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
The net income of the Company during the three months ended September
30, 1996 and 1995, was $2.2 million and $1.3 million, $0.37 and $0.36 per
share, respectively. The Company's earnings per share during the three months
ended September 30, 1996, includes the effect of the issuance of 2,335,000
common shares of beneficial interest issued pursuant to the Offering in July
1996.
Interest income - loans increased by $700,000 (47%), from $1.5 million
during the three months ended September 30, 1995, to $2.2 million during the
three months ended September 30, 1996. This increase was primarily
attributable to (i) the reallocation of the Company's initial investment of
the proceeds of the IPO in cash and U.S. Government securities to higher-
yielding loans to small businesses and (ii) portfolio growth from the proceeds
of borrowing arrangements and the Offering. The average invested assets in
loans to small businesses increased by $23.6 million (46%), from $51.1 million
during the three months ended September 30, 1995, to $74.7 million during the
three months ended September 30, 1996. The annualized average yields on loans
for the three months ended September 30, 1996 and 1995 were approximately 12.4%
and 12.0%, respectively. Interest income - loans includes interest earned on
loans, the accretion of a discount on purchased loans (approximately $7,500 and
$6,700 during the three months ended September 30, 1996 and 1995, respectively)
and the accretion of deferred commitment fees (approximately $76,000 and
$33,000 during the three months ended September 30, 1996 and 1995,
respectively).
Interest and dividends - other investments increased by $558,000 from
$7,000 during the three months ended September 30, 1995, to $565,000 during the
three months ended September 30, 1996. This increase was due to an increase in
funds available for short-term investments which resulted from the completion
of the structured financing in March 1996, and from the completion of the
Offering in July 1996. The average short-term investments of the Company
increased by $41.8 million, from $779,000 during the three months ended
September 30, 1995, to $42.6 million during the three months ended September
30, 1996. The average yields on short-term investments during the three months
ended September 30, 1996 and 1995 were approximately 5.3% and 3.7%,
respectively.
Other income increased by $123,000 (192%), from $64,000 during the three
months ended September 30, 1995, to $187,000 during the three months ended
September 30, 1996. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment penalties, (iii) late and other loan fees and
(iv) miscellaneous collections. The increase was primarily due to the
collection of prepayment penalties during the three months ended September 30,
1996 of $72,000. Additionally, income recognized from other loan-related fees,
such as assumption, modification and extension fees, increased by $55,000 from
$14,000 during the three months ended September 30, 1995, to $69,000
12
<PAGE> 15
during the three months ended September 30, 1996. These increases were offset
by income recognized from the monitoring of hospitality construction projects
in process which decreased by $11,000 from $50,000 during the three months
ended September 30, 1995, to $39,000 during the three months ended September
30, 1996.
Expenses, other than interest expense, consisted primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to PMC
Commercial'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 direct transaction costs incident to
the acquisition and disposition of investments, regular legal and auditing fees
and expenses, the fees and expenses of PMC Commercial'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. The
Company, rather than the Investment Manager, is also 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 $520,000 in management fees for the three months ended
September 30, 1996, $251,000 of which were incurred as a cost of the Offering.
Of the total management fees paid or payable to the Investment Manager during
the three months ended September 30, 1996, $76,000 has been offset against
commitment fees as a direct cost of originating loans and the $251,000
described above has been offset against additional paid-in capital. Investment
management fees were $316,000 for the three months ended September 30, 1995.
Of the total management fees paid or payable to the Investment Manager during
the three months ended September 30, 1995, $35,000 was offset against
commitment fees as a direct cost of originating loans. The increase in
investment management fees of $204,000 (prior to offsetting direct costs
related to the origination of loans and the issuance of the Company's common
shares), or 65%, is primarily due to consulting fees incurred for the placement
of common shares of $251,000. This increase was offset by a decrease in the
Base Fee calculated pursuant to the Investment Management Agreement. The
average quarterly invested assets increased by $24.2 million or 47% from $51.2
million during the quarter ended September 30, 1995 to $75.4 million during the
quarter ended September 30, 1996, and average quarterly common equity capital
increased by $3 million, or 6% from $47.8 million during the quarter ended
September 30, 1995 to $50.8 million during the quarter ended September 30,
1996.
Legal and accounting fees increased by $5,000 (56%), from $9,000 during
the three months ended September 30, 1995, to $14,000 during the three months
ended September 30, 1996. This increase is attributable to billing of
accounting and corporate legal fees during the three months ended September 30,
1996.
General and administrative expenses increased by $15,000 (65%), from
$23,000 during the three months ended September 30, 1995, to $38,000 during
the three months ended September 30, 1996. This increase is primarily
attributable to an increase in costs related to printing expenses and the
Company's structured financing and revolving credit facility during the three
months ended September 30, 1996.
13
<PAGE> 16
Interest expense of $516,000 relates primarily to interest on the
structured financing (approximately $488,000), the amortization of deferred
borrowing costs (approximately $23,000), and interest incurred on borrower
advances (approximately $5,000) during the three months ended September 30,
1996. The obligation to pay interest on borrower advances is included in
borrower advances on the accompanying consolidated balance sheets. During the
three months ended September 30, 1995, the Company incurred interest expense on
its revolving credit facility of $16,000 and interest on borrower advances of
$9,000.
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.
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 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.
In general, to meet its liquidity requirements, including expansion of
its outstanding loan portfolio, the Company, after utilization of any available
working capital, may use: (i) its short-term credit facility as described
below, (ii) placement of long-term borrowings, (iii) issuance of debt
securities and/or (iv) offerings of additional equity securities, including
preferred shares of beneficial interest (the "Preferred Shares"). 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 PMC Capital, Inc., an affiliate of the Company, or to one or
more of PMC Capital's subsidiaries.
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 September 30, 1996, the Company
had no outstanding borrowings under the revolving credit facility and an
availability of $20 million. The Company is charged interest on the balance
outstanding, if any, under the revolving 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.
During March 1996, the Company, through a limited partnership structure,
completed a private placement of approximately $29.5 million of notes issued
pursuant to a rated structured financing collateralized by a portion of the
Company's commercial loan portfolio (the "Private Placement"). The financing
resulted in net proceeds to the Company of approximately $27.1 million, of
which approximately $10.3 million were used to repay outstanding borrowings
under the Company's revolving credit facility. During July 1996, the Company
completed the sale of 2,335,000 of its Common Shares in the Offering, resulting
in net proceeds to the Company of $34.5 million.
14
<PAGE> 17
As a result of the proceeds from the Private Placement and the Offering,
the Company had $36.1 million of cash and cash equivalents at September 30,
1996. In addition, funds will be available to the Company from the proceeds of
the dividend reinvestment plan and amounts received from the repayment of loans
advanced pursuant to the SBA 504 program. At September 30, 1996, the Company
had approximately $46 million in outstanding commitments to originate loans.
To the extent the Company has available funds, an additional $5.1 million in
commitments made by the Investment Manager were designated for the Company at
September 30, 1996. It is anticipated that these loans will be funded by the
Company. Such commitments are made in the ordinary course of the Company's
business and 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 amount does not necessarily represent future cash requirements.
Loan demand has remained strong. The Private Placement and the Offering
have provided the Company with sufficient funds to expand the outstanding
portfolio consistent with historical growth levels. After utilization of
these funds and until such time as additional long-term financing is available,
the Company will continue to borrow funds based on a variable rate of interest
by utilizing its revolving credit facility, and originating loans with a fixed-
rate of interest. Net income on these leveraged funds will be materially
dependent on the spread between the rate at which it borrows funds and the rate
at which it loans these funds.
Management anticipates that (i) available short-term investments, (ii)
availability under the revolving credit facility and (iii) proceeds from the
dividend reinvestment plan and the SBA 504 loan program, will be adequate to
meet its existing obligations.
RISKS ASSOCIATED WITH LEVERAGE
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 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.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED ON THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The forward-
looking statements included herein are based on current expectations that
involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or
15
<PAGE> 18
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 Form 10-Q 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.
16
<PAGE> 19
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Investment Management Agreement between the Company
and PMC Advisers, Inc., dated July 1, 1996.
27 Financial Data Schedule
B. Forms 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
17
<PAGE> 20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Commercial Trust
Date: 11/14/96 /s/ Lance B. Rosemore
---------- ---------------------------------------
Lance B. Rosemore
President
Date: 11/14/96 /s/ Barry N. Berlin
---------- ---------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Investment Management Agreement between the Company and PMC
Advisers, Inc., dated July 1, 1996.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
INVESTMENT MANAGEMENT AGREEMENT
This Investment Management Agreement (the "Agreement") dated this 1st
day of July, 1996 by and among PMC Commercial Trust, a Texas real estate
investment trust (the "Company"), PMC Advisers, Inc., a Texas corporation ("PMC
Advisers" or the "Investment Manager"), a wholly-owned subsidiary of PMC
Capital, Inc. ("PMC Capital"), and PMC Capital.
1. 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 Annual Value of All Invested Assets at Date of Termination"
shall mean the book value of the Invested Assets at Date of Termination
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.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Equity Capital" shall mean the sum of the stated capital plus
the additional paid-in capital for the Common Shares.
"Common Shares" shall mean the Company's common shares of beneficial
interest, par value $.01 per share.
"GAAP" shall mean generally accepted accounting principles.
<PAGE> 2
"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 Section 2 of this
Agreement.
"Invested Assets at Date of Termination" shall mean Primary Investments
and Other Investments and any Primary Investments or Other Investments that
arise from loan commitments, letters of intent or other agreements, in any
case, as in existence on the Termination Date, as set forth on a schedule to be
prepared by the Company and delivered to PMC Capital not later than 45 days
from such date of termination, which schedule shall be annually updated by the
Company and delivered to PMC Capital not later than 90 days following the end
of each of the Company's fiscal years during which the Non-Compete Agreement
(as defined in Section 10 of this Agreement) is in effect.
"Other Investments" shall have the meaning set forth in Section 2 of
this Agreement.
"Person" shall mean an individual, corporation, partnership,
association, trust or any unincorporated organization or other entity.
"Primary Investments" shall have the meaning set forth in Section 2 of
this Agreement.
"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.
"Termination Date" shall mean the date on which this Agreement no longer
has any force and effect, whether as a result of being terminated in accordance
with the provisions of Section 10 hereof (following the expiration of the
60-day notice period provided for therein) or as a result of non-renewal (at
the expiration of the term hereof) for whatever reason.
2. PURPOSE OF THE COMPANY
The Company intends primarily to originate business loans (a) 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, (b) in excess of $1,100,000 to small
business enterprises without regard to SBA eligibility requirements, (c) for
which PMC Capital does not have available funds to make such loans or (d) 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
-2-
<PAGE> 3
(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 Code.
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.
3. 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.
4. OBLIGATIONS OF THE INVESTMENT MANAGER
As the Investment Manager, PMC Advisers will:
(a) 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;
(b) provide the Company with office space and services to the
extent required by the Company's trust managers, officers and employees;
(c) maintain the Company's books of account and other records
and files;
(d) 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;
-3-
<PAGE> 4
(e) 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;
(f) 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 acquired Investments to be delivered to the Company's
custodian;
(g) on a continuing basis, monitor, manage and service the
Company's Investments; and
(h) arrange debt and equity financing for the Company, subject
to policies adopted by the Company's trust managers.
5. 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:
(a) 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;
(b) 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
(c) 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 Section 5.
-4-
<PAGE> 5
6. 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:
(a) all expenses of the Company's organization and of any
offering and sale by the Company of its shares;
(b) expenses of the Company operations, except as otherwise
provided in Section 5 above;
(c) financing costs and debt service with respect to
indebtedness of the Company;
(d) taxes on income and taxes and assessments on real
property, if any, and all other taxes applicable to the Company;
(e) 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, whether such expenses are directly incurred
by the Company or are allocated to the Company by the Investment Manager
either pursuant to this Agreement or as otherwise agreed to by the Board
of Trust Managers of the Company from time to time;
(f) expenses of organizing, revising, amending, converting,
modifying or terminating the Company;
(g) 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;
(h) 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 Section 5 above, and any
-5-
<PAGE> 6
expenses allocated to the Company by the Investment Manager as agreed to
by the Board of Trust Managers of the Company from time to time;
(i) all insurance costs incurred in connection with the
Company (including officer and trust manager liability insurance, if
any);
(j) 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;
(k) 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;
(l) transfer agent's, registrar's and indenture trustee's fees
and charges;
(m) legal, accounting and auditing fees and expenses; and
(n) 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.
7. 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 at the
time such investment transaction is consummated. 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 Section 7. In the event that any trust manager should
disagree, the matter shall be conclusively resolved by a majority of the trust
managers of the Company, including a majority of the Independent Trust
Managers.
-6-
<PAGE> 7
8. 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:
I. Quarterly in arrears, a fee ("Base Fee") consisting of a
quarterly servicing and advisory fee equal to the sum of (a) the
product of 0.4167% (1.67% on an annual basis) multiplied by the
lesser of (i) the Average Quarterly Value of Common Equity
Capital or (ii) the Average Quarterly Value of All Invested
Assets and (b) the product of 0.21875% (0.875% on an annual
basis) and the difference between the Average Quarterly Value of
All Invested Assets and the Average Quarterly Value of Common
Equity Capital. Notwithstanding the foregoing or any other
provision contained herein, the Base Fee payable to the
Investment Manager hereunder shall be reduced for each quarter
during the term of this 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 any Invested Assets. For purposes
of calculating the Base Fee, the Average Quarterly Value of
Common Equity Capital shall not be increased by the proceeds
received from 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) during the 180
calendar day period immediately following such public offering.
II. Quarterly in arrears, a consulting fee equal to the sum of
(a) the product of 50% multiplied by the amount of fees
contractually due to any third party assisting in the placement
of any of the Company's debt securities or preferred shares of
beneficial interest and (b) the product of 12.5% multiplied by
the amount of any fees contractually due any third party
assisting in the placement or underwriting of any private or
public offering of Common Shares (the "Offering Fee"). If the
Offering Fee is less than 5.5%, the consulting fee shall be
increased by an amount equal to the product of (i) 50% of the
difference between 5.5% and the actual Offering Fee multiplied by
(ii) the gross proceeds of the offering.
In no event, however, shall the aggregate amount of the fees payable to
the Investment Manager pursuant to this Section 8 exceed, on an annual basis,
the fees that would have been payable to the Investment Manager pursuant to the
terms of Section 8 of the prior Investment Management Agreement between the
Company and the Investment Manager, which terms are attached hereto as Exhibit
B.
-7-
<PAGE> 8
9. 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, as amended, 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.
10. TERM OF THE AGREEMENT; TERMINATION
The term of this Agreement shall commence as of the first day of July
1996 and shall remain in effect and is renewable annually thereafter by the
Company, if (a) a majority of the Independent Trust Managers determines that
(i) the Investment Manager's performance has been satisfactory and (ii) the
terms of this Agreement are appropriate with respect to the Company's
performance and then existing economic conditions and (b) 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, pursuant to a majority vote of the
Independent Trust Managers or upon the vote of the holders of more than
two-thirds of the outstanding shares of the Company, or, in the case of a
termination by the Investment Manager, by a majority vote of the independent
directors of the Investment Manager.
In the event this Agreement is terminated or not renewed by (i) the
Company, other than as a result of a material breach of the terms of this
Agreement by the Investment Manager, or (ii) the Investment Manager as a result
of a material breach of the terms of this Agreement by the Company, PMC Capital
shall enter into a non-compete agreement, substantially in the form attached
hereto as Exhibit C, which shall have a term of seven (7) years following the
Termination Date (the "Non-Compete Agreement"). The payment to be made by the
Company to PMC Capital as consideration for the Non-Compete Agreement entered
into as a result of in the occurrence of any event set forth in clause (i) or
(ii) in the preceding sentence shall be an amount equal to the product of the
Non-Compete Percentage (as hereinafter defined) multiplied by the Average
Annual Value of All Invested Assets at Date of Termination, calculated and
payable on an annual basis and prorated on the basis of a 360-day year for any
portion of a calendar year during which the Non-Compete Agreement is in effect.
In the event this Agreement is terminated or not renewed by (x) the Company as
a result of a material breach of the terms of this Agreement by the Investment
Manager or (y) the Investment Manager, other than as a result of a material
breach of the terms of this Agreement by the Company, PMC Capital shall enter
into the Non-Compete Agreement either on the terms and conditions provided
herein and in Exhibit C hereto or, at the Company's option, such other terms as
may be mutually agreeable to PMC Capital and the Company. The "Non-Compete
Percentage" shall be equal to
-8-
<PAGE> 9
1% less the amount of the percentage, determined by dividing the dollar amount
of loan losses on the Invested Assets at Date of Termination in any year (or
portion thereof) during which the Non-Compete Agreement is in effect (as
determined based on the audited financial statements of the Company for that
year), by the Average Annual Value of All Invested Assets at Date of
Termination for such year, in excess of 1%. In no event will the annual fee
payable pursuant to the Non-Compete Agreement be reduced below zero.
Notwithstanding anything contained in this Section 10 to the contrary, in the
event that, following the Termination Date, the Company has foreclosed on an
outstanding loan and has liquidated the collateral relating thereto and
otherwise exhausted all remedies available to it to collect any remaining
deficiency on such obligation, the Company shall, upon written request of the
Investment Manager, transfer to the Investment Manager all files related to
such loan. If the Investment Manager is successful in collecting any
additional amount of the deficiency it may retain 1% of such additional amount
and shall return the remainder to the Company.
11. ASSIGNMENT, AMENDMENTS AND WAIVERS
The Company may terminate this Agreement at any time in the event of its
assignment by the Investment Manager 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 Section 11, 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.
-9-
<PAGE> 10
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.
12. 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 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.
13. 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.
-10-
<PAGE> 11
14. 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.
15. 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.
16. 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 Code 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, as amended, or Bylaws of the Company,
except if such 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, as amended, 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.
-11-
<PAGE> 12
17. 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 Section 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 Section 17 shall be reported to the Company annually within ninety (90)
days following the end of the Company's fiscal year.
18. 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.
19. 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.
20. JURISDICTION
This Agreement shall be governed by the laws of Texas.
21. 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,
-12-
<PAGE> 13
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.
22. SURVIVAL OF OBLIGATIONS
The obligations of the Company, PMC Capital and the Investment Manager
set forth in Section 10 hereof shall survive any termination or non-renewal of
this Agreement for a period of seven (7) years following the Termination Date.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
PMC COMMERCIAL TRUST
By:
---------------------------------------
Andrew S. Rosemore
Chairman of the Board and
Executive Vice President
PMC ADVISERS, INC.
By:
---------------------------------------
Lance B. Rosemore
President
PMC CAPITAL, INC.
By:
---------------------------------------
Lance B. Rosemore
President
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 31, 1996 FORM 10Q OF PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,803
<SECURITIES> 36,133,586
<RECEIVABLES> 80,639,603<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,777,056<F2>
<CURRENT-LIABILITIES> 7,330,845<F3>
<BONDS> 27,847,563
0
0
<COMMON> 84,924,787
<OTHER-SE> (326,139)
<TOTAL-LIABILITY-AND-EQUITY> 119,777,056
<SALES> 0
<TOTAL-REVENUES> 7,071,078
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 933,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,300,627
<INCOME-PRETAX> 4,836,936
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,836,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,836,936
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<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 $ 91,229
(ii) Deferred borrowing costs 397,867
(iii) Restricted investments 2,502,968
----------
$2,992,064
==========
<F3>Includes the following:
(i) Dividends payable $2,307,620
(ii) Accounts payable 47,128
(iii) Interest payable -
(iv) Borrower advances 3,668,640
(v) Unearned commitment fees 1,105,955
(vi) Due to affiliates 11,895
(vii) Unearned construction
monitoring fees 189,607
----------
$7,330,845
==========
</FN>
</TABLE>
