<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 JUNE 30, 1997
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) 349-3200
- ------------------------------- -----------------------------------
(Address of principal (Registrant's telephone number)
executive offices)
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 August 1, 1997, Registrant had outstanding 6,259,945 Common Shares of
Beneficial Interest, par value $.01 per share.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Income (Unaudited) -
Six Months Ended June 30, 1997 and 1996 3
Three Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
PART I
Financial Information
ITEM 1. Financial Statements
1
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Loans receivable, net ............................................................ $ 105,908 $ 91,981
Cash equivalents ................................................................. 7,520 25,952
Restricted investments ........................................................... 6,501 2,759
----------- -----------
Total investments .................................................................. 119,929 120,692
----------- -----------
Other assets:
Cash ............................................................................. 29 32
Interest receivable .............................................................. 607 615
Deferred borrowing costs, net .................................................... 390 376
Other assets, net ................................................................ 30 34
----------- -----------
Total other assets ................................................................. 1,056 1,057
----------- -----------
Total assets ....................................................................... $ 120,985 $ 121,749
=========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable .................................................................... $ 24,960 $ 26,648
Borrower advances ................................................................ 3,204 4,492
Dividends payable ................................................................ 2,556 2,495
Unearned commitment fees ......................................................... 1,035 1,160
Due to affiliates ................................................................ 381 625
Unearned construction monitoring fees ............................................ 114 185
Interest payable ................................................................. 140 149
Other liabilities ................................................................ 168 166
----------- -----------
Total liabilities .................................................................. 32,558 35,920
----------- -----------
Beneficiaries' equity:
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01
par value; 6,233,242 and 6,085,495 shares issued and outstanding at June 30,
1997 and December 31, 1996, respectively .................................... 62 61
Additional paid-in capital ....................................................... 88,724 86,249
Cumulative net income ............................................................ 20,433 15,288
Cumulative dividends ............................................................. (20,792) (15,769)
----------- -----------
Total beneficiaries' equity ........................................................ 88,427 85,829
----------- -----------
Total liabilities and beneficiaries' equity ........................................ $ 120,985 $ 121,749
----------- -----------
Net asset value per share .......................................................... $ 14.19 $ 14.10
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS
2
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Revenues:
Interest income - loans .................................. $ 6,000 $ 3,755
Interest and dividends - other investments ............... 459 259
Other income ............................................. 438 119
---------- ----------
Total revenues ............................................. 6,897 4,133
---------- ----------
Expenses:
Interest ................................................. 898 785
Advisory and servicing fees, net ......................... 700 607
General and administrative ............................... 77 56
Provision for loan losses ................................ 40 --
Legal and accounting fees ................................ 38 26
---------- ----------
Total expenses ............................................. 1,753 1,474
---------- ----------
Net income ................................................. $ 5,144 $ 2,659
========== ==========
Weighted average shares outstanding ........................ 6,167,832 3,547,842
========== ==========
Net income per share ....................................... $ 0.83 $ 0.75
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Revenues:
Interest income - loans .................................. $ 3,223 $ 1,959
Interest and dividends - other investments ............... 172 205
Other income ............................................. 338 62
---------- ----------
Total revenues ............................................. 3,733 2,226
---------- ----------
Expenses:
Interest ................................................. 454 533
Advisory and servicing fees, net ......................... 369 331
General and administrative ............................... 46 31
Provision for loan losses ................................ 20 --
Legal and accounting fees ................................ 24 17
---------- ----------
Total expenses ............................................. 913 912
---------- ----------
Net income ................................................. $ 2,820 $ 1,314
========== ==========
Weighted average shares outstanding ........................ 6,208,173 3,576,072
========== ==========
Net income per share ....................................... $ 0.45 $ 0.37
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 5,144 $ 2,659
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount and fees ............................ (489) (343)
Amortization of organization and borrowing costs .......... 27 34
Provision for loan losses ................................. 40 --
Commitment fees collected, net ............................ 379 590
Construction monitoring fees collected, net ............... 43 119
Changes in operating assets and liabilities:
Accrued interest receivable ........................... 8 (65)
Other assets .......................................... (37) (36)
Interest payable ...................................... (9) 108
Borrower advances ..................................... (1,288) 2,202
Due to affiliates ..................................... (244) (406)
Other liabilities ..................................... 2 236
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 3,576 5,098
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded .................................................. (26,750) (13,631)
Principal collected ........................................... 12,653 2,094
Investment in restricted investments, net ..................... (3,742) (2,742)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ........................... (17,839) (14,279)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ...................... 2,267 1,627
Proceeds from issuance of notes payable ...................... -- 39,141
Payment of dividends ......................................... (4,735) (2,754)
Payment of principal on notes payable ........................ (1,688) (17,393)
Payment of borrowing costs ................................... -- (451)
Payment of issuance costs .................................... (16) (311)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............. (4,172) 19,859
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (18,435) 10,678
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 25,984 207
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 7,549 $ 10,885
============ ============
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested ......................................... $ 226 $ 75
============ ============
Dividends declared, not paid ................................. $ 2,556 $ 1,367
============ ============
Interest paid ................................................ $ 886 $ 685
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Commercial Trust
("PMC Commercial") and its subsidiaries (collectively the "Company") as of June
30, 1997, the consolidated statements of income for the three and six months
ended June 30, 1997 and 1996, and the consolidated statements of cash flows for
the six months ended June 30, 1997 and 1996 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 June 30, 1997, the results of operations for
the three and six months ended June 30, 1997 and 1996, and the cash flows for
the six months ended June 30, 1997 and 1996. 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 1996 Annual
Report on Form 10-K.
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 results for the six months ended June 30, 1997 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 six months ended June 30, 1997, PMC Commercial
declared dividends to its shareholders of beneficial interest of $0.41 and
$0.81 per share, respectively.
NOTE 4. DUE TO AFFILIATE:
Pursuant to an investment management agreement (the "Investment
Management Agreement") between the Company and PMC Advisers, Ltd., an
affiliated entity (the "Investment
6
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DUE TO AFFILIATE: (CONTINUED)
Manager"), the Company incurred fees of approximately $791,000 for the six
months ended June 30, 1997. Of the servicing and advisory fees paid or payable
to the Investment Manager as of June 30, 1997, $91,000 has been offset against
commitment fees as a direct cost of originating loans.
Pursuant to the amended Investment Management Agreement, based on
terms as defined therein, the quarterly servicing and advisory fee (the
"Management 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 Management Fee, the Average Quarterly Value of
Common Equity Capital was 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 day period ended December 31, 1996. Beginning January 1,
1997, the Average Quarterly Value of Common Equity Capital includes $34.5
million of proceeds received from a public offering of 2,335,000 Common Shares
of Beneficial Interest completed by PMC Commercial during July 1996 (the
"Offering"). In no event will the aggregate annual fees charged under the
amended 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 (the "Private Placement") of $29.5
million of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes"). The
Notes, issued at par, have a stated maturity in 2016, bear interest at the rate
of 6.72% per annum and are collateralized by loans contributed by PMC
Commercial to the Partnership of which $31.4 million remained outstanding at
June 30, 1997. Approximately $25.0 million of Notes remained outstanding at
June 30, 1997.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share. SFAS No. 128 is designed to
improve the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of PMC Commercial's earnings per
share data to that of similar entities. SFAS No. 128 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on earnings per share will not be
significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No.
7
<PAGE> 10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS: (CONTINUED)
129 is effective for financial statements for periods ending after December 15,
1997. In the opinion of management, the effect of this pronouncement on the
Company's financial position or results of operations will not be significant.
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 organized in June 1993. From December 28, 1993
(commencement of operations) through June 30, 1997, PMC Commercial funded an
aggregate principal amount (including approximately $1.3 million of purchased
loans) of approximately $137.2 million related to 131 loans. During the three
and six months ended June 30, 1997, the Company funded loans of approximately
$13 million and $27 million, respectively, and collected commitment fees of
approximately $94,000 and $379,000, respectively. During the years ended
December 31, 1996 and 1995, PMC Commercial originated and funded loans of
approximately $40.4 million and $31.7 million, respectively, and collected
commitment fees of approximately $1.3 million and $546,000, respectively.
As of June 30, 1997, the total loan portfolio outstanding was $107.6
million ($105.9 million after reductions for loans purchased at a discount and
deferred commitment fees) with a weighted average contractual interest rate of
approximately 11.0%. 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. Generally, these loans are collateralized by
first liens on real estate, and guaranteed by the principals of the businesses
financed. Included in principal outstanding at June 30, 1997 is $5.0 million of
interim financing which has been 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 customarily charged by the
Company.
At June 30, 1997, the Company's loan portfolio consisted of
approximately 28% and 12% of loans to borrowers in Texas and Maryland,
respectively. No other state had a concentration of 10% or greater at June 30,
1997. The Company's loan portfolio was approximately 97% concentrated in the
lodging industry at June 30, 1997.
When originating a loan, PMC Commercial 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
recognized as an adjustment of yield over the life of the related loan. The
Company had approximately $1.6 million in net unamortized deferred commitment
fees at June 30, 1997.
From inception through June 30, 1997, PMC Commercial experienced no
loan charge-offs. At June 30, 1997, no loan was delinquent for a period greater
than 60 days.
All loans originated by PMC Commercial presently provide for fixed
interest rates. The weighted average interest rates for loans funded during the
six months ended June 30, 1997, and the years ended December 31, 1996, 1995 and
1994 were 10.68%, 10.86%, 11.42% and 11.05%, respectively.
9
<PAGE> 12
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. 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. At June 30, 1997, the
Company had a $40,000 loan loss reserve.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. SFAS No. 128 is designed to improve the
earnings per share information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of PMC Commercial's earnings per share data to
that of similar entities. SFAS No. 128 is effective for financial statements
for periods ending after December 15, 1997. In the opinion of management, the
effect of this pronouncement on earnings per share will not be significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on the Company's financial
position or results of operations will not be significant.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
The net income of the Company during the six months ended June 30,
1997 and 1996, was $5.1 million and $2.7 million, $0.83 and $0.75 per share,
respectively. The Company's earnings per share during the six months ended June
30, 1997 includes the effect of the issuance of 2,335,000 Common Shares of
Beneficial Interest (the "Common Shares") issued pursuant to the Offering in
July 1996.
10
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Interest income - loans increased by $2.2 million (58%), from $3.8
million during the six months ended June 30, 1996, to $6.0 million during the
six months ended June 30, 1997. This increase was primarily attributable to the
reallocation of the Company's initial investment of the proceeds from the
Private Placement in March 1996 and the Offering in July 1996 from cash and
government securities to higher-yielding loans to small businesses. The average
invested assets in loans to small businesses increased by $37.7 million (59%),
from $63.8 million during the six months ended June 30, 1996, to $101.5 million
during the six months ended June 30, 1997. The annualized average yields on
loans, including all loan fees earned, for the six months ended June 30, 1997
and 1996 were approximately 12.5% and 11.9%, respectively. The increased yield
was primarily a result of the recognition of prepayment fees (included in other
income as discussed below) and the remaining unamortized deferred fees as
income on loan prepayments. During the six months ended June 30, 1997,
approximately $9.9 million on 11 loans was paid in full with a corresponding
recognition of approximately $186,000 of deferred fee income. Interest income -
loans includes interest earned on loans, the accretion of a discount on
purchased loans (approximately $16,000 and $14,000 during the six months ended
June 30, 1997 and 1996, respectively) and the accretion of deferred commitment
fees (approximately $359,000 and $115,000 during the six months ended June 30,
1997 and 1996, respectively).
Interest and dividends - other investments increased by $200,000
(77%), from $259,000 during the six months ended June 30, 1996, to $459,000
during the six months ended June 30, 1997. This increase was due to an increase
in funds available for short-term investments resulting from the Private
Placement in March 1996 and the Offering in July 1996. The average short-term
investments of the Company increased by $7.8 million (84%), from $9.3 million
during the six months ended June 30, 1996, to $17.1 million during the six
months ended June 30, 1997. The average yields on short-term investments during
the six months ended June 30, 1997 and 1996 were approximately 5.4% and 5.6%,
respectively.
Other income increased by $319,000, from $119,000 during the six
months ended June 30, 1996, to $438,000 during the six months ended June 30,
1997. Other income consists of: (i) amortization of construction monitoring
fees, (ii) prepayment penalties, (iii) late and other loan fees and (iv)
miscellaneous collections. This increase was primarily attributable to the
collection of $282,000 of prepayment fees on loans prepaid during the six
months ended June 30, 1997 (see "Competition"). Additionally, income recognized
from the monitoring of construction projects in process increased by $45,000,
from $70,000 during the six months ended June 30, 1996, to $115,000 during the
six months ended June 30, 1997. This increase was offset by a decrease in
income recognized from assumption, modification and extension fees, of $5,000
from $46,000 during the six months ended June 30, 1996, to $41,000 during the
six months ended June 30, 1997.
Expenses, other than interest expense, consist 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, if
any. The Company, rather than the Investment Manager, is also required to pay
expenses associated with any
11
<PAGE> 14
litigation and other extraordinary or nonrecurring expenses. The Investment
Management Agreement was amended on July 1, 1996, resulting in investment
management fees being reduced from 2.5% to 1.67% of invested assets and from
1.5% to 0.875% of invested assets in excess of beneficiaries' equity. Pursuant
to the amended Investment Management Agreement, the Company incurred an
aggregate of $791,000 in management fees for the six months ended June 30,
1997. Of the total management fees paid or payable to the Investment Manager
during the six months ended June 30, 1997, $91,000 has been offset against
commitment fees as a direct cost of originating loans. Investment management
fees were $750,000 for the six months ended June 30, 1996. Of the total
management fees paid or payable to the Investment Manager during the six months
ended June 30, 1996, $143,000 was offset against commitment fees as a direct
cost of originating loans. The increase in investment management fees of
$41,000 (prior to offsetting direct costs related to the origination of loans),
or 5%, is primarily due to increases in the Company's invested assets and
common equity capital. The average invested assets increased by $36.9 million
(58%), from $63.8 million during the six months ended June 30, 1996, to $100.7
million during the six months ended June 30, 1997. The average common equity
capital increased by $38.3 (78%), from $49.1 million during the six months
ended June 30, 1996, to $87.4 million during the six months ended June 30,
1997.
Legal and accounting fees increased by $12,000 (46%), from $26,000
during the six months ended June 30, 1996, to $38,000 during the six months
ended June 30, 1997. This increase is attributable to an increase in corporate
legal fees during the six months ended June 30, 1997.
General and administrative expenses increased by $21,000 (38%), from
$56,000 during the six months ended June 30, 1996, to $77,000 during the six
months ended June 30, 1997. This increase is primarily attributable to an
increase in costs related to: (i) printing and shareholder servicing expenses
as a result of the increased number of shareholders of record and (ii) the
Company's revolving credit facility during the six months ended June 30, 1997.
Interest expense during the six months ended June 30, 1997 consisted
primarily of interest incurred on the Notes issued pursuant to the Private
Placement (approximately $870,000) and interest incurred on borrower advances
(approximately $43,000). During the six months ended June 30, 1996, interest
expense consisted of interest incurred on the Notes issued pursuant to the
Private Placement (approximately $628,000), interest incurred on the Company's
revolving credit facility (approximately $138,000) and interest incurred on
borrower advances (approximately $19,000).
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 JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
The net income of the Company during the three months ended June 30,
1997 and 1996, was $2.8 million and $1.3 million, $0.45 and $0.37 per share,
respectively. The Company's earnings per share during the three months ended
June 30, 1997 includes the effect of the issuance of 2,335,000 Common Shares
issued pursuant to the Offering in July 1996 and pursuant to stock issuances
under the Company's Dividend Reinvestment and Share Purchase Plan.
Interest income - loans increased by $1.2 million (60%), from $2.0
million during the three months ended June 30, 1996, to $3.2 million during the
three months ended June 30, 1997. This
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<PAGE> 15
increase was primarily attributable to the reallocation of the Company's
initial investment of the proceeds from the Private Placement in March 1996 and
the Offering in July 1996 from cash and government securities to
higher-yielding loans to small businesses. The average invested assets in loans
to small businesses increased by $39.2 million (59%), from $66.6 million during
the three months ended June 30, 1996, to $105.8 million during the three months
ended June 30, 1997. The annualized average yields on loans for the three
months ended June 30, 1997 and 1996 were approximately 13.3% and 11.9%,
respectively. The increased yield was primarily a result of the recognition of
prepayment fees (included in other income as discussed below) and the remaining
unamortized deferred fees as income on loan prepayments. During the three
months ended June 30, 1997, approximately $9.5 million on 10 loans was paid in
full with a corresponding recognition of approximately $180,000 of deferred fee
income. Interest income - loans includes interest earned on loans, the
accretion of a discount on purchased loans (approximately $8,000 and $7,000
during the three months ended June 30, 1997 and 1996, respectively) and the
accretion of deferred commitment fees (approximately $274,000 and $64,000
during the three months ended June 30, 1997 and 1996, respectively).
Interest and dividends - other investments decreased by $33,000 (16%),
from $205,000 during the three months ended June 30, 1996, to $172,000 during
the three months ended June 30, 1997. This decrease was due to a reduction in
funds available for short-term investments during the three months ended June
30, 1997. The proceeds from the Private Placement in March 1996 and from the
Offering in July 1996 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 decreased by $3.8
million (23%), from $16.2 million during the three months ended June 30, 1996,
to $12.4 million during the three months ended June 30, 1997. The average
yields on short-term investments during the three months ended June 30, 1997
and 1996 were approximately 5.5% and 5.0%, respectively.
Other income increased by $276,000, from $62,000 during the three
months ended June 30, 1996, to $338,000 during the three months ended June 30,
1997. 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
$265,000 in prepayment fees on loans prepaid during the three months ended June
30, 1997 (see "Competition"). Additionally, income recognized from the
monitoring of construction projects in process increased by $23,000, from
$31,000 during the three months ended June 30, 1996, to $54,000 during the
three months ended June 30, 1997. This increase was offset by a decrease in
income recognized from assumption, modification and extension fees, of $6,000,
from $25,000 during the three months ended June 30, 1996, to $19,000 during the
three months ended June 30, 1997.
Expenses, other than interest expense, consist 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
13
<PAGE> 16
Agreement, the Company incurred an aggregate of $405,000 in management fees for
the three months ended June 30, 1997. Of the total management fees paid or
payable to the Investment Manager during the three months ended June 30, 1997,
$36,000 has been offset against commitment fees as a direct cost of originating
loans. Investment management fees were $394,000 for the three months ended June
30, 1996. Of the total management fees paid or payable to the Investment
Manager during the three months ended June 30, 1996, $63,000 was offset against
commitment fees as a direct cost of originating loans. The increase in
investment management fees of $11,000 (prior to offsetting direct costs related
to the origination of loans and the issuance of the Company's Common Shares),
or 3%, is primarily due to increases in the Company's invested assets and
common equity capital. The average invested assets increased by $38.3 million
(57%) from $66.8 million during the three months ended June 30, 1996, to $105.1
million during the three months ended June 30, 1997. The average common equity
capital increased by $38.6 million (78%), from $49.6 million during the three
months ended June 30, 1996, to $88.2 million during the three months ended June
30, 1997.
Legal and accounting fees increased by $7,000 (41%), from $17,000
during the three months ended June 30, 1996, to $24,000 during the three months
ended June 30, 1997. This increase is attributable to billing of accounting and
corporate legal fees during the three months ended June 30, 1997.
General and administrative expenses increased by $15,000 (48%), from
$31,000 during the three months ended June 30, 1996, to $46,000 during the
three months ended June 30, 1997. This increase is primarily attributable to an
increase in costs related to: (i) printing and shareholder servicing expenses
resulting from the increased number of shareholders of record and (ii) the
Company's revolving credit facility during the three months ended June 30,
1997.
Interest expense during the three months ended June 30, 1997 consisted
primarily of interest on the Notes issued pursuant to the Private Placement
(approximately $425,000) and interest incurred on borrower advances
(approximately $18,000). During the three months ended June 30, 1996, interest
expense consisted of interest incurred on the Notes issued pursuant to the
Private Placement (approximately $523,000), interest incurred on borrower
advances (approximately $8,000), and interest incurred on the Company's
revolving credit facility (approximately $2,000).
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 PMC Commercial's funds is to originate loans. PMC
Commercial also uses funds for the: (i) acquisition of loans from governmental
agencies and/or their agents, (ii) payment of dividends to shareholders, (iii)
payment of management and advisory fees (in lieu of salaries and other
administrative overhead), (iv) payment of general corporate overhead and (v)
payment of interest and principal on borrowed funds.
At June 30, 1997, the Company had $7.5 million of cash and cash
equivalents and approximately $31.6 million of loan commitments outstanding to
small business concerns in the lodging industry. The weighted average interest
rate on these future funding commitments at June 30, 1997 was approximately
10.7%. These commitments include approximately $9.7 million of funding
14
<PAGE> 17
which remains on construction loan commitments outstanding and approximately
$6.0 million of loan commitments outstanding relating to SBA 504 Program loans.
An additional $7.4 million in commitments made by the Investment Manager had
been designated for PMC Commercial at June 30, 1997, with a weighted average
interest rate of 10.6%, subject to availability of funds. These commitments are
made in the ordinary course of business and, in management's opinion, are
generally on the same terms as those to existing borrowers. 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, PMC Commercial intends to use: (i) its
short-term credit facility as described below, (ii) placement of long-term
borrowings, (iii) the securitization and sale of a portion of the loan
portfolio, (iv) issuance of debt securities, and/or (v) offering 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 affiliates of the Company
with respect to which the Company will receive no fees. 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.
The Company has a credit facility which provides up to the lesser of
$20 million or an amount equal to 50% of the value of the underlying property
collateralizing the borrowings. At June 30, 1997, 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 and through SBA 504 Program loan takeouts.
Management anticipates these sources of funds will be adequate to meet its
existing obligations.
On March 12, 1996 the Company completed the Private Placement of
approximately $29.5 million of Notes, issued pursuant to a rated structured
financing, which are collateralized by the Partnership's commercial loan
portfolio. The Private Placement resulted in net proceeds to the Company of
approximately $27.3 million, of which approximately $10.3 million were used to
repay outstanding borrowings under the Company's credit facility. Net profit on
these leveraged funds is materially dependent on the spread between the rate at
which it borrowed these funds (6.72% on $25.0 million outstanding at June 30,
1997) and the rate obtained on loan of these funds (at June 30, 1997, the
outstanding loans collateralizing this transaction of $31.4 million have a
weighted average coupon of approximately 11.3%). 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.
15
<PAGE> 18
In July 1996, PMC Commercial completed the sale of 2,335,000 Common
Shares pursuant to the Offering. The Offering resulted in net proceeds to the
Company of $34.5 million, of which approximately $547,000 were used to pay
costs in connection with the Offering.
After utilization of the funds available as described above, the
Company will continue to borrow funds based on a variable rate of interest
(short-term borrowings) through its existing credit facility and originate
loans at a fixed rate of interest. Loan demand has remained high for the types
of loans originated by the Company. The Private Placement and Offering will not
provide the Company with sufficient capital to expand the outstanding portfolio
at historical growth levels. Accordingly, the Company is seeking additional
sources of financing, and it is anticipated that during the latter half of the
year, the Company will attempt to structure a financing similar to the Private
Placement for proceeds between $30 million to $40 million. There can be no
assurance the Company will be able to raise funds through this financing
source. If this source of funds is not available, the Company will have to
either (i) fully utilize its $20 million revolving credit facility, (ii)
increase its revolving credit facility, (iii) issue senior debt and/or (iv)
issue Common or Preferred Shares. To the extent none of these financing options
are available, the Company will have to slow the rate of increasing the
outstanding loan portfolio.
COMPETITION
PMC Commercial's primary competition comes from banks, financial
institutions and franchise loan programs. Some of these competitors have
greater financial and larger managerial resources than the Company. Competition
has increased as the financial strength of the banking and thrift industries
improved. Management of the Company believes that PMC Commercial competes
effectively with such entities on the basis of the interest rates, maturities
and payment schedules, the quality of its service, its reputation as a lender,
the timely credit analysis and decision making processes, and the renewal
options available to borrowers.
The Company experienced a 99% increase in loans originated, from $13.6
million during the six months ended June 30, 1996, to $27 million during the
six months ended June 30, 1997. However, the Company has experienced some loan
prepayment activity during the same period due, in significant part, to
increased competition. In management's opinion, there has been an increasing
amount of competitor lending activity at advance rates and interest rates which
are considerably more aggressive than those offered by the Company. In order to
maintain a quality portfolio, the Company will continue to adhere to its
historical underwriting criteria. Consequently, certain loan origination
opportunities will not be funded by the Company and prepayment activity may
continue. However, it is the intention of management to cushion the effect that
this competition has on the Company's loan portfolio by reducing the interest
rates offered to a niche group of qualified borrowers that the Company has not
historically served. These lower interest rates will be available for borrowers
whose related properties; (i) have more seasoned demonstrated debt service
coverages and reduced loan-to-value ratios as compared to our present borrowers
and (ii) otherwise meet the underwriting criteria established by the Company.
16
<PAGE> 19
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 and, in most instances, are
identified through the use of words such as "anticipates," "expects" and
"should." 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 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.
17
<PAGE> 20
PART II
Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
14, 1997, the following members were elected to the Board of
Trust Managers:
Andrew S. Rosemore
Lance B. Rosemore
Irving Munn
Roy H. Greenberg
Nathan Cohen
Martha Greenberg
Ira Silver
The following proposal was approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----------- -------- -----------
<S> <C> <C> <C>
To ratify the appointment of Coopers &
Lybrand L.L.P. as the independent public
accountants of the Company 5,599,272 12,456 54,745
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Forms 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1997.
18
<PAGE> 21
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: 08/08/97 \s\ Lance B. Rosemore
------------- -------------------------------
Lance B. Rosemore
President
Date: 08/08/97 \s\ Barry N. Berlin
------------- -------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
19
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 FORM 10-Q OF PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 29
<SECURITIES> 7,520
<RECEIVABLES> 106,555<F1>
<ALLOWANCES> (40)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,985<F2>
<CURRENT-LIABILITIES> 7,598<F3>
<BONDS> 24,960
0
0
<COMMON> 88,786
<OTHER-SE> (359)
<TOTAL-LIABILITY-AND-EQUITY> 120,985
<SALES> 0
<TOTAL-REVENUES> 6,897
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 898
<INCOME-PRETAX> 5,144
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,144
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<FN>
<F1>Includes current and long-term portion of all loans receivable - before reserve
and related interest receivable.
<F2>Includes the following items not included above:
(i) Other assets, net $ 30
(ii) Deferred borrowing costs 390
(iii) Restricted investments 6,501
-------
$ 6,921
=======
<F3>Includes the following items not included above:
(i) Dividends payable $ 2,556
(ii) Other liabilities 168
(iii) Interest payable 140
(iv) Borrower advances 3,204
(v) Unearned Commitment fees 1,035
(vi) Due to affiliates 381
(vii) Unearned construction
monitoring fees 114
-------
$ 7,598
=======
</FN>
</TABLE>
