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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
17290 PRESTON ROAD, 3RD FLOOR, DALLAS, TX 75252 (972) 380-0044
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES OF BENEFICIAL INTEREST, $.01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Shares of
Beneficial Interest on February 28, 1997 as reported on the American Stock
Exchange, was approximately $108 million. Common Shares of Beneficial Interest
held by each officer and trust manager and by each person who owns 10% or more
of the outstanding Common Shares of Beneficial Interest have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 1997, Registrant had outstanding 6,132,222 Common Shares of
Beneficial Interest.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the year covered by this Form
10-K with respect to the Annual Meeting of Shareholders to be held on May 14,
1997 are incorporated by reference into Part III.
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PMC COMMERCIAL TRUST
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form
10-K
Report
Item Page
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<S> <C>
PART I
1. Business .................................................................................. 1
2. Properties................................................................................. 11
3. Legal Proceedings.......................................................................... 11
4. Submission of Matters to a Vote of Security Holders........................................ 11
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters................ 12
6. Selected Consolidated Financial Data...................................................... 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 14
8. Consolidated Financial Statements and Supplementary Data.................................. 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 20
PART III
10. Directors and Executive Officers of the Registrant........................................ 21
11. Executive Compensation.................................................................... 21
12. Security Ownership of Certain Beneficial Owners and Management............................ 21
13. Certain Relationships and Related Transactions............................................ 21
PART IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................................................ 22
Glossary......................................................................................... 23
Signatures....................................................................................... 24
Consolidated Financial Statements ............................................................... F-1
Exhibits......................................................................................... E-1
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
PMC Commercial Trust (the "Company") is a commercial lender that
originates loans to small business enterprises, which loans are primarily
collateralized by first liens on real estate of the related business. The
Company lends primarily to borrowers who operate in the lodging industry. The
Company also targets commercial real estate, service, retail and manufacturing
industries. The Company was formed on June 4, 1993 and commenced operations on
December 28, 1993 as a real estate investment trust ("REIT") pursuant to the
Texas Real Estate Investment Trust Act. The Company generates income from
interest payments and other related fee income from its lending activities. The
investments of the Company are managed pursuant to an investment management
agreement with PMC Advisers, LTD ("PMC Advisers" or the "Investment Manager"
formerly known as PMC Advisers, Inc.), an indirect wholly-owned subsidiary of
PMC Capital, Inc. ("PMC Capital"). The Company is an affiliate of PMC Capital,
which primarily engages in the business of originating loans to small
businesses under loan guarantee and funding programs sponsored by the Small
Business Administration (the"SBA"). Capitalized terms not otherwise defined
herein shall have the meanings set forth in the Glossary.
The Company's principal business objective is to maximize
shareholders' returns by expanding its loan portfolio while adhering to its
underwriting criteria. The Company currently has three principal strategies to
achieve this objective. First, the Company expects to continue to benefit from
the established customer base of PMC Capital due to the referral system
available through PMC Advisers. Many of the Company's existing and potential
borrowers have other projects that are currently financed by PMC Capital;
however, PMC Capital's borrowers' financing needs have grown over time and now
exceed the limitations set for SBA approved loan programs. In addition,
borrowers who have financial strength and stability in excess of the SBA loan
program criteria represent lending opportunities. Second, the Company is
seeking to expand its relationship with national hotel and motel franchisors to
secure a consistent flow of lending opportunities. Third, the Company will
continue to obtain cost-effective financing to maximize its growth through
structured financing arrangements and other funding sources. On March 12, 1996,
the Company completed a private placement (the "Private Placement") of
$29,500,000 of Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes")
through a special purpose affiliate of the Company, PMC Commercial Receivable
Limited Partnership, a Delaware limited partnership (the "Partnership"). The
Company owns, directly or indirectly, all of the interests in the Partnership.
In connection with the private placement, the Notes received a "AA" rating from
Duff & Phelps Credit Rating Co.
LOAN ORIGINATIONS
To date, a significant portion (96.8%) of the Company's loan portfolio
consists of loans to small business owners in the lodging industry. The
majority of the Company's loans in the lodging industry are to owner-operated
facilities generally under national hotel or motel franchises. As of December
31, 1996, (i) 96.7% of the Company's outstanding loan portfolio consisted of
loans for the acquisition, renovation and construction of hotels, and (ii)
Holiday Inn and Days Inn franchisees accounted for 21.1% and 18.5%,
respectively, of the Company's outstanding loan portfolio. Management believes
that borrowers in the hotel and motel franchise industry are underserved by
traditional lending sources.
The Company operates from the offices of the Investment Manager in
Texas, Florida, Georgia and Arizona, and management anticipates the Company
will conduct operations from any future office of the Investment Manager. The
Investment Manager receives loan referrals from PMC Capital and solicits loan
applications on behalf of the Company from borrowers, through personal
contacts, attendance at trade shows, meetings and correspondence with local
chambers of commerce, direct mailings, advertisements in trade publications and
other marketing methods. The
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Company is not responsible for any compensation to PMC Capital for referrals.
In addition, the Company has generated a significant percentage of loans
through referrals from lawyers, accountants, real estate brokers, loan brokers
and existing borrowers. In some instances the Company may make payments to
non-affiliated individuals who assist in generating loan applications, with
such payments generally not exceeding 1% of the principal amount of the loan.
Through December 31, 1996, the Company has not made or committed to any such
payment.
The Investment Manager, PMC Capital and the Company have entered into
a loan origination agreement (the "Loan Origination Agreement") designed to
avoid conflicts of interest regarding the loan origination function. The Loan
Origination Agreement generally requires that loans which meet the Company's
underwriting criteria be funded by the Company, provided that funds are
available. In such event, loans will not be made by PMC Capital other than: (i)
loans in an original principal amount not exceeding $1.1 million which qualify
for the SBA Section 7(a) or small business investment company ("SBIC") loan
programs utilized by its subsidiaries and (ii) bridge loans to be refinanced by
SBA Section 7(a) upon approval of the SBA loan application. Generally, the
Company originates loans to borrowers who exceed one or more of the limitations
applicable to the SBA Section 7(a) and SBIC loan programs utilized by PMC
Capital's subsidiaries. The Company will not originate loans in principal
amounts less than $1.1 million which qualify for SBA Section 7(a) or SBIC loan
programs unless PMC Capital is unable to originate such loans because of
insufficient available funds.
All prospective investments are considered by the Investment Manager
for investment by the Company. In the event that the Company does not have
funds available, lending opportunities presented to the Company may be
originated by PMC Capital or its subsidiaries.
Upon receipt of a completed loan application, the Investment Manager's
credit department (which is also the credit department for PMC Capital)
conducts: (i) an analysis of the loan which may include either a third-party
appraisal or valuation, by the Investment Manager, of the property
collateralizing the loan to assure compliance with loan-to-value ratios, (ii) a
site inspection generally by a member of senior management of the Investment
Manager, (iii) a review of the borrower's business experience and (iv) a credit
history and an analysis of debt service coverage and debt-to-equity ratios.
The Investment Manager's loan committee (which is also the loan
committee of PMC Capital), which is comprised of members of the Company's
senior management, makes a determination with respect to each loan application.
The Investment Manager's loan committee generally meets on a daily basis and
either approves the loan application as submitted, approves the loan
application subject to additional conditions or rejects the loan application.
After a loan is approved, the credit department will prepare and submit to the
borrower a good faith estimate and cost sheet detailing the anticipated costs
of the financing. The closing department reviews the loan file and assigns the
loan to the Company's outside counsel, the fees of whom are paid by the
borrower. Prior to authorizing disbursement for any funding of a loan, the
closing department reviews the loan documentation obtained from the closing
attorney.
After a loan is closed, the Investment Manager's servicing department
(which is also the servicing department of PMC Capital) is responsible on an
ongoing basis for (i) obtaining all financial information required by the loan
documents, (ii) verifying that adequate insurance remains in effect, (iii)
continuing Uniform Commercial Code financing statements evidencing the loan, if
required, (iv) collecting and applying loan payments, and (v) monitoring
delinquent accounts.
LENDING ACTIVITIES
During the years ended December 31, 1996 and 1995, the Company funded
loans to 32 and 31 corporations, partnerships or individuals for approximately
$40.4 and $31.7 million and collected commitment fees of approximately $1.3
million and $546,000, respectively.
The Company purchased two loans with a face value of $1,502,000 for
$1,325,000 from certain governmental
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agencies during the year ended December 31, 1994. The original discount of
$177,000 on these loans is netted against loans receivable and is being
amortized over the remaining life of the loans. During the years ended December
31, 1996 and 1995, approximately $30,000 and $26,000, respectively of the
discount was recognized as interest income. Subsequent to December 31, 1994,
the Company has purchased no loans.
Approximately 32% of the Company's loan portfolio as of December 31,
1996 consisted of loans to borrowers in Texas. No other state had a
concentration of 10% or greater at December 31, 1996. At December 31, 1995,
approximately 32% and 12% of the Company's loan portfolio consisted of loans to
borrowers in Texas and Maryland, respectively. The Company's loan portfolio was
approximately 97% and 96% concentrated in the lodging industry at December 31,
1996 and 1995, respectively.
When originating a loan, the Company charges a commitment fee. In
accordance with Statement of Financial Accounting Standards ("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 $1.4 million
and $975,000 in net unamortized deferred commitment fees at December 31, 1996
and 1995, respectively.
LOAN PORTFOLIO
From December 28, 1993 (commencement of operations) through December
31, 1996, the Company has funded an aggregate principal amount (including
purchased loans) of approximately $110.3 million related to 114 loans. The
weighted average interest rate for the Company's loans outstanding as of
December 31, 1996 was 11.1%.
All loans are paying as agreed. From inception through December 31,
1996, the Company experienced no loan losses and no charge-offs.
All loans originated by the Company presently provide for fixed
interest rates. The weighted average interest rates for loans funded during the
years ended December 31, 1996, 1995 and 1994 and in the period from
commencement of operations (December 28, 1993) to December 31, 1993 were
10.86%, 11.42%, 11.05% and 11.50%, respectively. The following table sets forth
the interest rates charged under the Company's portfolio for the loans
originated for the period from inception to December 31, 1993 and the years
ended December 31, 1994, 1995 and 1996.
INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED (2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTEREST RATES
-----------------------------------------------------------------------------------------------
PERIOD ORIGINATED 10.00-10.49% 10.50-10.99% 11.00-11.49% 11.50-11.99% 12.00-12.25% TOTAL
----------------- ------------ ------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31,
1993 (1)..................... $ -- $ -- $ -- $ 3,216 $ -- $ 3,216
Year ended December 31,
1994 ........................ -- 19,181 4,263 10,083 131 33,658
Year ended December 31,
1995 ........................ -- 3,562 8,469 19,459 221 31,711
Year ended December 31,
1996 ........................ 3,978 27,102 4,595 4,755 -- 40,430
-------- -------- -------- -------- -------- --------
Total $ 3,978 $ 49,845 $ 17,327 $ 37,513 $ 352 $109,015
======== ======== ======== ======== ======== ========
Percentage of Portfolio 3.7% 45.7% 15.9% 34.4% 0.3% 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
(1) The Company commenced operations on December 28, 1993.
(2) Does not include purchased loans.
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The following table sets forth a breakdown of the Company's loan
portfolio at December 31, 1996 to borrowers involved in the lodging (national
franchises and independent hotels) and commercial real estate industries:
<TABLE>
<CAPTION>
Principal Percentage
No. of Outstanding of
Loans (In thousands) Portfolio
------- -------------- ----------
<S> <C> <C> <C>
Holiday Inn (1) ...................... 20 $19,726 21.1%
Days Inn (2) ......................... 16 17,310 18.5%
Comfort Inn (3) ...................... 9 9,730 10.4%
Ramada Inn ........................... 5 6,887 7.3%
Best Western (4) ..................... 7 5,819 6.2%
Quality Inn (5) ...................... 4 5,417 5.8%
Hampton Inn (6) ...................... 6 4,520 4.8%
Howard Johnsons (7) .................. 4 4,179 4.5%
Econolodge ........................... 3 3,460 3.7%
Super 8 .............................. 4 2,869 3.1%
Sleep Inn (8) ........................ 3 2,129 2.3%
Travelodge (9) ....................... 2 968 1.0%
Clarion Inn .......................... 1 896 1.0%
Knights Inn .......................... 1 630 0.7%
Microtel Inn ......................... 1 280 0.3%
Wingate Inn .......................... 1 177 0.2%
------- ------- -----
Total of Franchise Affiliates 87 84,997 90.9%
Independent Hotels ................... 7 5,436 5.8%
Commercial Real Estate ............... 2 3,049 3.3%
------- ------- -----
Total ................................ 96 $93,482 100.0%
======= ======= =====
</TABLE>
- ---------------
(1) Represents (i) seven loans originated for Holiday Inn franchisees with
$7,578,000 principal outstanding which represents 8.1% of the loan
portfolio, including one furniture, fixtures and equipment loan ("FFE
Loan") of $153,000 and one SBA 504 Program loan of $570,000, and (ii)
thirteen loans originated for Holiday Inn Express franchisees with
$12,148,000 principal outstanding which represents 13.0% of the loan
portfolio, including one FFE Loan of $51,000 and one SBA 504 Program loan
of $158,000.
(2) Includes one SBA 504 Program loan of $537,000.
(3) Represents (i) seven loans originated for Comfort Inn franchisees with
$7,595,000 principal outstanding which represents 8.1% of the loan
portfolio, including two SBA 504 Program loans totaling $1,366,000, and
(ii) two loans originated for Comfort Inn Suites franchisees with
$2,135,000 principal outstanding which represents 2.3% of the loan
portfolio.
(4) Includes one FFE Loan of $251,000.
(5) Includes one loan for a Quality Inn Suites franchisee with $1,980,000
principal outstanding which represents 2.1% of the portfolio.
(6) Includes two FFE Loans of $685,000.
(7) Includes one FFE Loan of $55,000.
(8) Includes one SBA 504 Program loan of $267,000.
(9) Includes one SBA 504 Program loan of $122,000.
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LOANS ORIGINATED OR PURCHASED BY QUARTER (1)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
First Quarter .............. $ 7,039 $ 9,328 $ 4,830
Second Quarter ............. 13,594 11,110 8,801
Third Quarter .............. 6,471 4,441 12,955
Fourth Quarter ............. 7,879 6,832 13,844
--------- --------- ---------
$ 34,983 $ 31,711 $ 40,430
========= ========= =========
</TABLE>
- ---------------
(1) The Company commenced operations on December 28, 1993 and funded a $3.2
million loan in the period from commencement of operations through
December 31, 1993.
The following table sets forth the amount of the Company's loans
originated and repaid for the period and years indicated:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 4, 1993
YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION) TO
------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 (1)
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable - beginning of period ...... $ 59,129 $ 32,694 $ 3,119 $ --
Loans originated or purchased ............... 40,430 31,711 34,983 3,216
Loan repayments (2) ......................... (7,181) (4,992) (4,862) --
Other adjustments (3) ....................... (397) (284) (546) (97)
-------- -------- -------- --------
Loans receivable - end of period ............ $ 91,981 $ 59,129 $ 32,694 $ 3,119
======== ======== ======== ========
</TABLE>
- ---------------
(1) The Company commenced operations on December 28, 1993.
(2) Includes the payoff on certain SBA 504 Program loans and prepaid loans.
(3) Includes effect of amortization of loans purchased at a discount and
commitment fees collected which are accounted for in accordance with SFAS
No. 91.
OPERATIONS
During the year ended December 31, 1996, the Company increased its total
assets and loan portfolio under management through utilization of proceeds from
the issuance of the Notes and a public offering of common shares of beneficial
interest ("Common Shares").
On March 12, 1996, the Partnership completed the Private Placement. The
Company owns, directly or indirectly, all of the interests of the Partnership.
The Notes, issued at par, which have a stated maturity in 2016 and bear
interest
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at the rate of 6.72% per annum, were collateralized by an initial amount of
approximately $39.7 million of loans contributed by the Company to the
Partnership. In connection with the Private Placement, the Notes were given a
rating of "AA" by Duff & Phelps Credit Rating Co. The contributed loans were
originated or purchased by the Company in accordance with its lending strategy
and underwriting criteria. The Partnership has the exclusive obligation for the
repayment of the Notes, and the holders of the Notes have no recourse to the
Company or its assets in the event of nonpayment. The net proceeds from the
issuance of the Notes (approximately $27.1 million after giving effect to costs
of $450,000 and a $1.9 million initial reserve deposit held by the trustee as
collateral) were distributed to the Company in accordance with its interest in
the Partnership. The Company used approximately $10.3 million of such proceeds
to pay down outstanding borrowings under its credit facility and the remainder
to originate loans in accordance with its underwriting criteria.
On July 2, 1996, the Company completed the sale of 2 million Common
Shares in a public offering and 60,000 Common Shares directly to certain
officers and trust managers of the Company. The net proceeds to the Company
from these issuances were $30.4 million. In July 1996, the Company 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 (collectively with the previous issuances, the
"Offering"). The proceeds of the Offering are being used to originate
additional loans in accordance with the Company's underwriting criteria. In
connection with the Offering, the Company incurred approximately $547,000 in
costs which were offset against additional paid-in capital at the time of the
Offering.
UNDERWRITING CRITERIA
The Company primarily originates loans to small businesses that (i)
exceed the net worth, asset, income, number of employees or other limitations
applicable to the SBA programs utilized by PMC Capital, (ii) require funds in
excess of $1.1 million without regard to SBA eligibility requirements, or (iii)
require funds which PMC Capital does not have available and which otherwise
meet the Company's underwriting criteria. Such loans ("Primary Investments")
are primarily collateralized by first liens on real estate of the related
business, are personally guaranteed by the principals of the entities obligated
on the loans and are subject to the Company's underwriting criteria.
The underwriting criteria applied by the Company to evaluate
prospective borrowers generally requires such borrowers to (i) provide
first-lien real estate mortgages not exceeding 70% of the lesser of appraised
value or cost, (ii) provide proven management capabilities, (iii) meet certain
criteria with respect to historical or projected debt coverage, and (iv) have
principals with satisfactory credit histories and provide personal guarantees,
as applicable.
Pursuant to management's investment policies, at least 75% of the
Company's assets must be utilized to fund the Primary Investments. In addition,
the Company may utilize a maximum of 25% of its assets to (i) purchase from
certain governmental agencies and other sellers, loans on which payments are
current at the time of the Company's commitment to purchase such loans and
which meet the Company's underwriting criteria, (ii) invest in other commercial
loans collateralized by real estate, and (iii) invest in real estate
(collectively, the "Other Investments"), provided that such Other Investments
do not affect the ability of the Company to maintain its qualification as a
REIT for Federal income taxes purposes under the Internal Revenue Code of 1986,
as amended (the "Code"). Management of the Company has broad discretion in
evaluating and pursuing investment opportunities.
LOAN PORTFOLIO CHARACTERISTICS
As a result of the application of the Company's underwriting criteria,
the Company's loan portfolio has the following characteristics:
(i) All loans used by borrowers to acquire real estate and/or
construct improvements thereon (the "Real Estate Loans") are
secured by first liens on such real estate or improvements
thereon. Generally, each of the
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related loans used to acquire furniture, fixtures and equipment
for certain of such real estate (the "FFE Loans") is secured by
a first lien on the furniture, fixtures and equipment acquired
with the proceeds of such loan and by a second lien on the real
property of the borrower under the related Real Estate Loans.
Other additional properties of certain borrowers or guarantors
have been used as additional collateral in some instances.
(ii) All originated loans are guaranteed by the principal(s) of the
borrowers.
(iii) The loan amounts of Real Estate Loans (together with related FFE
Loans) are generally equal to or less than 70% of the fair value
or cost of the primary collateral. When necessary, credit
enhancements, such as additional collateral, are obtained to
assure a maximum of 70% loan-to-value ratio.
The Company's loan portfolio also has the following characteristics:
a. At December 31, 1996, the Company had 96 loans outstanding with
an aggregate principal amount outstanding of approximately $93.5
million.
b. At December 31, 1996, all loans were paying as agreed, and none
of the loans were more than 30 days delinquent.
c. Borrowers are principally involved in the lodging industry
(96.7% as of December 31, 1996). The remainder of the loan
portfolio is comprised of two loans in the commercial office
rental market.
d. The Company has not loaned more than 10% of its assets to any
single borrower.
e. At December 31, 1996, the outstanding principal amounts of the
Real Estate Loans ranged from approximately $177,000 to
$2,446,000 and the outstanding principal amounts of FFE Loans
ranged from approximately $51,000 to $584,000.
f. All originated loans provide for interest payments at fixed
rates.
g. All originated loans, other than bridge loans for the SBA
Section 504 program (the "SBA 504 Program"), have original
maturities ranging from five to 20 years which may be extended,
subject to certain conditions, by mutual agreement of the
Company and the borrower until the loan is fully amortized if
such amortization period exceeds the stated maturity.
h. Originated loans, other than SBA 504 Program loans, provide for
scheduled amortization (ranging from six to 20 years).
Substantially all Real Estate Loans have balloon payment
requirements (which may be extended at maturity, subject to
certain conditions, by mutual agreement of the Company and the
borrower) and entitle the borrower to prepay all or part of the
principal amount, subject to a prepayment penalty.
i. At December 31, 1996, the weighted average remaining maturity
for the Company's portfolio of loans was approximately six
years.
DELINQUENCY AND COLLECTIONS
All loans were current as of December 31, 1996, although the Company
has had from time to time, loans delinquent for longer than 30 days. If a
borrower fails to make a required monthly payment, the borrower will generally
be notified by mail after 10 days and a late fee will generally be assessed. If
the borrower has not responded or made
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full payment within 20 days after the loan becomes delinquent, a second
notification letter will be sent. Following such notification, a collection
officer will initiate telephone contact. If the borrower has not responded or
made full payment within 30 days after the loan becomes delinquent, a third
notification letter will be sent and follow-up telephone contact will be made
by the collection officer. In the event a borrower becomes 45 days delinquent,
a ten day demand letter will be sent to the borrower requiring the loan to be
brought current within ten days. After the expiration of the ten day period,
the Company may proceed with legal action. The Company's policy with respect to
loans which are in arrears as to interest payments for a period in excess of 60
days is generally to discontinue the accrual of interest income. The Company
will deliver a default notice and begin foreclosure and liquidation proceedings
when it determines that pursuit of these remedies is the most appropriate
course of action. The Company continually monitors loans for possible exposure
to loss. In its analysis, the Company reviews various factors, including the
value of the collateral securing the loan and the borrower's payment history.
Based upon this analysis, a loan loss reserve will be established on a case by
case basis. Through December 31, 1996, no loan loss reserve had been
established.
SBA SECTION 504 PROGRAM
The Company participates as a private lender in the SBA 504 Program.
Participation in the SBA 504 Program offers an opportunity to enhance the
collateral status of loans. The SBA 504 Program provides assistance to small
business enterprises in obtaining subordinate long-term financing by
guaranteeing debentures available through certified development companies
(CDCs) for the purpose of acquiring land, buildings, machinery and equipment
and for modernizing, renovating or restoring existing facilities and sites. A
typical finance structure for an SBA 504 Program project would include a first
mortgage covering 50% of the project cost from a private lender such as the
Company, a second mortgage obtained through the SBA 504 Program covering up to
40% of the project cost and a contribution of at least 10% of the project cost
by the principals of the small business enterprise being assisted. The Company
generally requires at least 15% of the equity in a project to be contributed by
the principals of the borrower. The first mortgage is not guaranteed by the
SBA. Although the total size of projects utilizing the SBA 504 Program
guarantees are unlimited, the maximum amount of subordinated debt in any
individual project generally is $750,000 (or $1 million for certain projects).
Typical project costs range in size from $500,000 to $2.5 million. A business
eligible for financing pursuant to the SBA 504 Program must (i) be a for-profit
corporation, partnership or proprietorship, (ii) not exceed $6 million in net
worth, and (iii) not exceed $2 million in average net income (after Federal
income taxes) for each of the previous two years. Financing pursuant to the SBA
504 Program cannot be used for working capital or inventory, consolidating or
repaying debt or financing a plant not located in the U.S. or its possessions.
As of December 31, 1996, the Company had approximately $3 million outstanding
which is anticipated to be paid off by permanent subordinated financing
provided by the SBA 504 Program.
OTHER INVESTMENTS
The Company has purchased from certain governmental agencies two loans
secured by first liens on real estate at a discount. The Investment Manager has
selected and evaluated such loans using substantially the same underwriting
criteria applicable to originated loans. When purchasing loans, underwriting
information received by the Investment Manager, such as loan applications,
financial statements, property appraisals and other loan documentation that was
developed by the original lending institution may be outdated. In such cases,
the Investment Manager will seek to supplement this information with additional
data such as credit reports on borrowers, geographical analysis, industry
demographics, economic data and in selected cases, current property appraisals
or site visits. Prohibitions by sellers against contacting borrowers might
limit the Investment Manager's ability to obtain accurate current information
about borrowers and the Investment Manager may have to rely on the original
underwriting information with limited ability to verify the information. These
loans are currently performing as agreed.
While the Company has not done so to date, it may also finance real
estate investors who are not operators of the properties financed. Such loans
would be collateralized by a lien on the real estate acquired or other real
estate owned by the borrower or its principals. The personal guaranty of one or
more of the principals would typically be
8
<PAGE> 11
obtained. The loans would generally carry a fixed rate of interest and have
maturities of five to 20 years from the date of origination. In some instances,
there may be earlier maturity dates or dates on which the interest rate may be
modified. Most loans would provide for scheduled monthly amortization and have
a balloon payment requirement. In addition, the Company may also purchase real
estate to hold in the Company's investment portfolio.
BORROWER ADVANCES
The Company finances some projects during the construction phase. At
December 31, 1996, the Company was in the process of monitoring construction
projects with approximately $28.6 million in total commitments, of which $12.1
million had been funded. As part of the monitoring process to verify that the
borrower's equity investment is utilized for its intended purpose, the Company
holds a portion of the borrower's equity investment. These funds are itemized
by category (e.g., interest, inventory, construction contingencies, etc.) and
are released by the Company only upon presentation of appropriate documentation
relating to the construction project. To the extent possible, these funds are
utilized before any related loan proceeds are disbursed. At December 31, 1996,
approximately $4.5 million of the borrower advances were to be disbursed on
behalf of borrowers and are included as a liability on the accompanying
consolidated balance sheet.
LOAN COMMITMENTS
At December 31, 1996, the Company had approximately $19.3 million of
loan commitments outstanding to 15 small business concerns in the lodging
industry. The weighted average interest rate on these loan commitments at
December 31, 1996 was 10.73%. In addition, the Company had approximately $16.5
million of loan commitments outstanding on 17 partially funded construction
loans and approximately $10.0 million of loan commitments outstanding on 14 SBA
504 Program loans. An additional $7.2 million in commitments made by the
Investment Manager had been designated for the Company at December 31, 1996,
with a weighted average interest rate of 10.64% subject to availability of
funds. These commitments are made in the ordinary course of business and, in
management's opinion, are generally on the same terms as those to existing
borrowers. Since some commitments expire without the proposed loan closing, the
total committed amounts do not necessarily represent future cash requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
TAX STATUS
The Company has elected to be taxed as a REIT under Section 856(c) of
the Code. As a REIT, the Company generally is not subject to Federal income tax
(including any applicable alternative minimum tax) to the extent it distributes
at least 95% of its REIT taxable income to shareholders. The Company may,
however, be subject to certain Federal excise taxes and state and local taxes
on its income and property. REITs are subject to a number of organizational
and operational requirements under the Code.
INVESTMENT MANAGER
The investments of the Company are managed by PMC Advisers pursuant to
the Investment Management Agreement. 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 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, the Company
incurred fees of approximately $251,000 as a cost of issuing its Common Shares
in the Offering, which have been offset against additional paid-in capital at
the time of the Offering.
9
<PAGE> 12
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.
Through June 30, 1996, pursuant to the Investment Management Agreement,
the Company was obligated to pay to the Investment Manager, quarterly in
arrears, a base fee consisting of a quarterly servicing fee of 0.125% of the
Average Quarterly Value of All Assets, representing on an annual basis
approximately 0.50% of the Average Annual Value of All Assets, and a quarterly
advisory fee of 0.25% of the Average Quarterly Value of All Invested Assets,
representing on an annual basis approximately 1% of the Average Annual Value of
All Invested Assets. An additional advisory fee was payable to the Investment
Manager in an amount equal to the product determined by multiplying the Average
Annual Value of All Invested Assets by 1% per annum. All such advisory fees
were reduced by 50% with respect to the value of Invested Assets that exceeded
Common Equity Capital as a result of leverage.
Pursuant to the Investment Management Agreement, including amendments,
the Company incurred an aggregate of approximately $1.6 million, $1.2 million
and $ 429,000 in management fees for the years ended December 31, 1996, 1995
and 1994, respectively, $251,000 of which has been offset against additional
paid-in capital as a cost of the Company completing the Offering in July 1996.
Of the total management fees paid or payable to the Investment Manager as of
December 31, 1996, 1995 and 1994, $318,500, $244,000 and $71,500, respectively,
have been offset against commitment fees as direct costs of originating loans.
Pursuant to the Investment Management Agreement, no advisory fees were due to
the Investment Manager from inception through June 30, 1994.
COMPETITION
The Company believes its primary competitors are banks, financial
institutions and other lending companies. Additionally, there are lending
programs which have been established by national franchisors in the lodging
industry. Many of these entities may have greater financial and larger
managerial resources than the Company. The Company believes that it competes
with such entities based on: (i) the interest rates, maturities and payment
schedules offered to borrowers, (ii) the reputation, experience and marketing
ability of officers of the Investment Manager, (iii) the timely credit analysis
and decision-making processes followed by the Investment Manager, and (iv) the
renewal options available to borrowers.
REPORTS TO SHAREHOLDERS
The Company provides annual reports to the holders of Common Shares
containing audited financial statements with a report thereon from the
Company's independent public accountants and, upon request, quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
EMPLOYEES
The Company has no salaried employees. All personnel required for the
Company's operations are provided by the Investment Manager.
10
<PAGE> 13
ITEM 2. PROPERTIES
The Company's operations are conducted in the offices of the Investment
Manager in Texas, Florida, Georgia and Arizona. Rental payments incurred are
paid by the Investment Manager pursuant to the Investment Management Agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation
incidental to its business. The Company does not believe that its current
proceedings will have a material adverse effect on the results of operations or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the last
quarter of the year ended December 31, 1996.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Shares have been traded on the American Stock Exchange (the
"AMEX") under the symbol "PCC" since February 1995 and from December 17, 1993
(the date the Common Shares first began trading) through January 1995 on the
Nasdaq National Market under the symbol "PMCTS". On February 28, 1997, there
were approximately 650 holders of record of Common Shares and the last reported
sales price of the Common Shares was $18.25. The following table sets forth for
the periods indicated the high and low sales prices as reported on the AMEX and
the Nasdaq National Market and the dividends per share declared by the Company
for each such period.
<TABLE>
<CAPTION>
Regular Special
Dividends Dividends
Per Per
Quarter Ended High Low Share Share
- ------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C>
March 31, 1994 .......... $15.25 $13.50 $0.240 --
June 30, 1994 ........... $15.38 $13.25 $0.240 --
September 30, 1994 ...... $15.00 $13.50 $0.240 --
December 31, 1994 ....... $14.25 $11.25 $0.280 $0.02
March 31, 1995 .......... $14.00 $11.75 $0.300 --
June 30, 1995 ........... $15.13 $12.25 $0.315 --
September 30, 1995 ...... $15.13 $13.75 $0.330 --
December 31, 1995 ....... $17.13 $13.88 $0.355 $0.08
March 31, 1996 .......... $17.88 $15.75 $0.370 --
June 30, 1996 ........... $17.38 $15.25 $0.380 --
September 30, 1996 ...... $16.88 $14.63 $0.385 --
December 31, 1996 ....... $18.00 $15.88 $0.390 $0.02
</TABLE>
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<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company as of and for the years ended December 31, 1996, 1995 and 1994 and
for the period from June 4, 1993 (date of inception) to December 31, 1993. The
following data should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere on this Form 10-K. The selected financial data presented below has
been derived from the consolidated financial statements of the Company audited
by Coopers & Lybrand L.L.P., independent public accountants, whose report with
respect thereto is included elsewhere on this Form 10-K.
<TABLE>
<CAPTION>
Period From
June 4, 1993
Years Ended December 31, (date of inception)
---------------------------------------------- to December 31,
1996 1995 1994 1993
----------- ----------- ----------- -------------------
(in thousands, except share and per share information)
<S> <C> <C> <C> <C>
Revenues:
Interest income-loans................ $ 8,528 $ 5,610 $ 2,289 $ 3
Interest and dividends - other
investments........................ $ 1,235 $ 325 $ 1,222 $ 13
Other income.......................... $ 385 $ 295 $ 180 $ --
Total revenues.......................... $ 10,148 $ 6,230 $ 3,691 $ 16
Expenses
Interest ............................. $ 1,805 $ 222 $ 37 $ --
Advisory and servicing fees, net...... $ 992 $ 945 $ 357 $ -- (3)
Other................................. $ 174 $ 167 $ 97 $ 1
Total expenses........................ $ 2,971 $ 1,334 $ 491 $ 1
Net income.............................. $ 7,177 $ 4,896 $ 3,200 $ 15
Weighted average common shares
outstanding........................... 4,755,289 3,451,091 3,430,009 3,099,530
Net income per common share............. $ 1.51 $ 1.42 $ 0.93 $ 0.01
Dividends per common share.............. $ 1.55 $ 1.38 $ 1.02 $ -- (3)
Return on average assets (1)............ 7.6% 8.8% 6.5% -- (3)
Return on average common beneficiaries'
equity (2)............................ 11.3% 10.2% 6.9% -- (3)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Loans receivable........................ $ 91,981 $ 59,129 $ 32,694 $ 3,119
Total assets............................ $ 121,749 $ 59,797 $ 51,785 $ 43,153
Notes payable .......................... $ 26,648 $ 7,920 $ -- $ --
Beneficiaries' equity................... $ 85,829 $ 48,183 $ 47,440 $ 42,941
Total liabilities and beneficiaries'
equity ................................ $ 121,749 $ 59,797 $ 51,785 $ 43,153
</TABLE>
- --------------
(1) Based on Average Annual Value of All Assets. See "Glossary."
(2) Based on the total beneficiaries' equity on the first day of the year and
on the last day of each quarter of such year divided by five.
(3) Not applicable due to initial period of operations which commenced on
December 28, 1993.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated in June 1993 and had no operations prior to
completion of its initial public offering (the "IPO") on December 28, 1993.
During the years ended December 31, 1996, 1995 and 1994, the Company originated
and funded $40.4 million, $31.7 million and $35.2 million of loans. The 1994
amount includes $1.5 million in purchased loans. The increase in funding during
1996 of $8.7 million (27%) over 1995 was primarily a result of the increased
availability of working capital. All of the above loan originations were to
corporations and individuals in the lodging industry except for approximately
$800,000 during the year ended December 31, 1996 and $2.7 million during the
year ended December 31, 1994.
As of December 31, 1996, the total portfolio outstanding was $93.5 million
($92 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. Generally, these loans are collateralized by
first liens on real estate and are guaranteed, for all but one loan, by the
principals of the businesses financed. Included in principal outstanding at
December 31, 1996 are $3.0 million of interim financing which have been
advanced pursuant to 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
reporting period. Actual results could differ from those estimates.
The Company follows the accounting practices prescribed by the American
Institute of Certified Public Accountants - Accounting Standards Division in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loan loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. To date,
no loan loss reserves have been established. The determination of whether
significant doubt exists and whether a loan loss provision is necessary for
each loan requires judgement and considers the facts and circumstances existing
at the evaluation date. Changes to the facts and circumstances of the borrower,
the lodging industry and the economy may require the establishment of
significant additional loan loss reserves. At such time as determination is
made that there exists significant doubt as to the ultimate realization of a
loan, the effect to operating results may be material.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The net income of the Company for the years ended December 31, 1996 and
1995, was $7.2 million and $4.9 million, $1.51 and $1.42 per share,
respectively.
Interest income - loans increased by $2,918,000 (52%) from $5,610,000 for
the year ended December 31, 1995, to $8,528,000 for the year ended December 31,
1996. 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 of Common Shares in July 1996, from cash and
government securities to higher-yielding loans to small businesses. The
14
<PAGE> 17
average invested assets in loans to small businesses increased by $25.7 million
(55%) from $46.8 million during the year ended December 31, 1995, to $72.5
million during the year ended December 31, 1996. The average yield on loans,
including all loan fees earned, for both of the years ended December 31, 1996
and 1995 was approximately 12.1%. Interest income - loans includes interest
earned on loans, the accretion of discount on purchased loans (approximately
$30,000 and $26,000 during the years ended December 31, 1996 and 1995,
respectively) and the accretion of deferred commitment fees (approximately
$283,000 and $197,000 during the years ended December 31, 1996 and 1995,
respectively).
Interest and dividends - other investments increased by $910,000 (280%),
from $325,000 during the year ended December 31, 1995, to $1,235,000 during the
year ended December 31, 1996. This increase was due to an increase in funds
available for short-term investments resulting from proceeds received from the
Private Placement in March 1996 and the Offering in July 1996. The average
short-term investments of the Company increased by $16 million (267%) from $6
million during the year ended December 31, 1995, to $22 million during the year
ended December 31, 1996. The average yields on short-term investments during
the years ended December 31, 1996 and 1995 were approximately 5.7% and 5.5%,
respectively.
Other income increased by $90,000 (31%) from $295,000 during the year
ended December 31, 1995, to $385,000 during the year ended December 31, 1996.
Other income consists of: (i) amortization of construction monitoring fees,
(ii) prepayment penalties, (iii) late fees and other loan fees, and (iv) other
miscellaneous collections. The increase was primarily attributable to other
loan fees collected during 1996, such as assumption fees ($59,000) and
modification fees ($41,000). The increase was offset by a $6,000 decrease in
construction monitoring fees on construction hotel/motel projects in process
recognized as income from $146,000 during the year ended December 31, 1995 to
$140,000 during the year ended December 31, 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 the Company's
officers (other than stock options) and the cost of office space, equipment and
other personnel required for the Company's day-to-day operations. The expenses
paid by the Company include direct transaction costs incident to the
acquisition and disposition of investments, corporate legal and auditing fees
and expenses, the fees and expenses of the Company's independent trust
managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of the Company's custodian and transfer agent, if
any. The Company, rather than the Investment Manager, is also required to pay
expenses associated with any litigation and other extraordinary or nonrecurring
expenses. Of the total management fees paid or payable to the Investment
Manager during the years ended December 31, 1996 and 1995, $318,500 and
$244,000, respectively, have been offset against commitment fees as a direct
cost of originating loans (the "Direct Costs").
The investment management fees incurred under the Investment Management
Agreement increased by $373,000 from $1,189,000 for the year ended December 31,
1995 to $1,562,000 for the year ended December 31, 1996. This increase includes
the $251,000 incurred as a cost of the Offering during 1996 and the Direct
Costs. The Investment Management Agreement was amended effective July 1996. The
discussion of the net remaining increase of $122,000 is presented below
distinguishing between the pre- and post-amended agreement.
Investment management fees increased by $222,000 (42%), prior to
offsetting direct costs related to the origination of loans, from $532,000
during the six months ended June 30, 1995, to $754,000 during the six months
ended June 30, 1996. This increase was primarily due to the Average Quarterly
Value of All Invested Assets increasing from $40.3 million during the six
months ended June 30, 1995, to $63.8 million during the six months ended June
30, 1996 (a $23.5 million, or 58%, increase), and Average Quarterly Value of
All Assets increasing from $51.6 million during the six months ended June 30,
1995, to $74.0 million during the six months ended June 30, 1996 (a $22.4
million, or 43% increase).
15
<PAGE> 18
Investment management fees decreased by $100,000 (15%), prior to
offsetting direct costs related to the origination of loans (not including the
effect of the issuance of Common Shares in the Offering during July 1996), from
$657,000 during the six months ended December 31, 1995, to $557,000 during the
six months ended December 31, 1996. This decrease is primarily attributable to
the reduced base fee rate charged pursuant to the amended Investment Management
Agreement. In general, fees were 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.
Additionally, for purposes of calculating the base fee in accordance with the
amended Investment Management Agreement, the Average Quarterly Value of Common
Equity Capital was not increased by the proceeds received from the Offering
from July 1 through December 31, 1996. The Average Quarterly Value of All
Invested Assets increased by $27 million (50%) from $53.7 million during the
six months ended December 31, 1995, to $80.7 million during the six months
ended December 31, 1996. The Average Quarterly Value of All Assets increased by
$31.2 million (57%) from $54.8 million during the six months ended December 31,
1995, to $86.0 million during the six months ended December 31, 1996. The
Average Quarterly Value of Common Equity Capital increased by $3.6 million or
(8%) from $47.9 million during the six months ended December 31, 1995, to $51.5
million during the six months ended December 31, 1996. All quarterly average
values were calculated pursuant to the Investment Management Agreement.
Legal and accounting fees decreased by $14,000 (20%) from $71,000 during
the year ended December 31, 1995, to $57,000 during the year ended December 31,
1996. This decrease is primarily attributable to a decrease in corporate legal
fees during the year ended December 31, 1996.
General and administrative expenses increased by $21,000 (22%) from
$96,000 during the year ended December 31, 1995, to $117,000 during the year
ended December 31, 1996. This increase is primarily attributable to increasing
shareholder servicing fees for dividend payments, and the cost of printing and
mailing the Company's annual reports and dividend reinvestment statements.
Interest expense during the year ended December 31, 1996 relates to
interest incurred on the structured financing completed in March 1996
(approximately $1.6 million), interest incurred on the Company's revolving
credit facility (approximately $138,000), the amortization of deferred
borrowing costs (approximately $75,000), and interest incurred on borrower
advances (approximately $47,000). During the year ended December 31, 1995, the
interest expense of $222,000 relates to interest incurred on the Company's
revolving credit facility (approximately $171,000) and interest incurred on
borrower advances (approximately $51,000).
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions for Federal income taxes in the
consolidated financial statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
The net income of the Company for the years ended December 31, 1995 and
1994, was $4.9 million and $3.2 million, $1.42 and $0.93 per share,
respectively.
Interest income - loans increased by $3.3 million (143%) from $2.3 million
for the year ended December 31, 1994, to $5.6 million for the year ended
December 31, 1995. This increase was primarily attributable to the reallocation
of the Company's initial investment of the proceeds of the IPO in cash and U.S.
Government securities to higher-yielding loans to small businesses. The average
invested assets in loans to small businesses increased by $27.9 million (148%)
from $18.9 million during the year ended December 31, 1994, to $46.8 million
during the year ended December 31, 1995. The average yields on loans for the
years ended December 31, 1995 and 1994 were approximately 12.1% and 13.2%,
respectively. Interest income - loans includes interest earned on loans, the
accretion of discount on purchased loans (approximately $26,000 and $22,000
during the years ended December 31, 1995 and 1994, respectively) and the
accretion of deferred commitment fees (approximately $197,000 and $166,000
during the years ended December 31, 1995 and 1994, respectively).
16
<PAGE> 19
Interest and dividends - other investments decreased by $875,000 (73%),
from $1.2 million during the year ended December 31, 1994, to $325,000 during
the year ended December 31, 1995. This decrease was due to the reduction in
funds available for short-term investments. The proceeds from the IPO were
initially invested in government securities and money market funds until
Primary Investments were identified and funded. The average short-term
investments of the Company decreased by $25.2 million (81%) from $31.2 million
during the year ended December 31, 1994, to $6.0 million during the year ended
December 31, 1995. The average yields on short-term investments during the
years ended December 31, 1995 and 1994 were approximately 5.5% and 3.9%,
respectively.
Other income increased by $115,000 (64%) from $180,000 during the year
ended December 31, 1994, to $295,000 during the year ended December 31, 1995.
Other income consists of: (i) amortization of construction monitoring fees,
(ii) prepayment penalties, (iii) late fees and other loan fees, and (iv) other
miscellaneous collections. The increase was primarily due to construction
hotel/motel projects in process which caused an increase of $111,000 in
construction monitoring fees recognized as income from $35,000 during the year
ended December 31, 1994, to $146,000 during the year ended December 31, 1995.
Expenses consisted primarily of the servicing and advisory fees paid to
PMC Advisers. The operating expenses borne by the Investment Manager include
any compensation to the Company's officers (other than stock options) and the
cost of office space, equipment and other personnel required for the Company's
day-to-day operations. The expenses paid by the Company include transaction
costs incident to the acquisition and disposition of investments, regular legal
and auditing fees and expenses, the fees and expenses of the Company's
independent trust managers, the costs of printing and mailing proxies and
reports to shareholders and the fees and expenses of the Company's custodian
and transfer agent, if any. The Company, rather than the Investment Manager,
will also be required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses. Pursuant to the Investment Management
Agreement, the Company incurred an aggregate of $1,189,000 in management fees
for the year ended December 31, 1995. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1995,
$244,000 have been offset against commitment fees as direct costs of
originating loans. Investment management fees were $429,000 for the year ended
December 31, 1994. For the six month period ended June 30, 1994, no advisory
fees were due to the Investment Manager. Of the advisory and servicing fees paid
or payable to the Investment Manager during the year ended December 31, 1994,
$71,500 were offset against commitment fees as direct costs of originating
loans. The increase in investment management fees of $760,000 (prior to
offsetting direct costs of originating loans), or 177%, is primarily due to the
increase in the average invested assets increasing from $18.9 million to $46.8
million and average total assets increasing from $49.0 million to $53.9 million.
Legal and accounting fees increased by $38,000 (115%) from $33,000 during
the year ended December 31, 1994, to $71,000 during the year ended December 31,
1995. This increase is attributable to higher accounting expenses and corporate
legal fees attributed to the increased corporate activity.
General and administrative expenses increased by $32,000 (50%) from
$64,000 during the year ended December 31, 1994, to $96,000 during the year
ended December 31, 1995. This increase is primarily attributable to (i)
shareholder servicing fees incurred during the year ended December 31, 1995 for
dividend payments, (ii) the cost of printing and mailing the Company's new
dividend reinvestment plan and annual reports, and (iii) the cost of
registration on the AMEX.
Interest expense of $222,000 relates to interest and non-utilization
charges on the Company's revolving credit facility (approximately $171,000) and
interest incurred on borrower advances during the year ended December 31, 1995
(approximately $51,000). The interest payable at December 31, 1995 of $56,000
pertained to interest incurred on the outstanding balance of the revolving
credit facility. The obligation to pay interest on borrowers advances is
included in borrower advances on the accompanying balance sheet.
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.
17
<PAGE> 20
CASH FLOW ANALYSIS
The Company generated $12.1 million and $3.8 million from operating
activities during the years ended December 31, 1996 and 1995, respectively. The
increase of $8.3 million (218%) was primarily due to fluctuations in borrower
advances which increased by $5.7 million from a use of $1.8 million in 1995, to
a source of $3.9 million in 1996, construction monitoring fees which increased
by $236,000 from a source of $8,000 in 1995, to a source of $244,000 in 1996,
and commitment fees which increased by $724,000 from a source of $546,000 in
1995, to a source of $1,270,000 in 1996. During 1995, the Company had
significant completion on many of the construction projects, with the result
being a net reduction in outstanding borrower advances, construction monitoring
fees and commitment fees at December 31, 1995. During 1996, the Company
originated and began funding several additional construction loans, resulting
in the collection of significant additional borrower advances, construction
monitoring fees and commitment fees. Additionally, net income increased by $2.3
million (47%) from $4.9 million during the year ended December 31, 1995, to
$7.2 million during the year ended December 31, 1996. Offsetting the increase
outlined above was a decrease in due to affiliates of $880,000 (133%) from a
source of $660,000 in 1995, to a use of $220,000 in 1996, resulting primarily
from the payment of management fees during the year ended December 31, 1996.
The Company used $36.0 million and $26.7 million through investing
activities during the years ended December 31, 1996 and 1995, respectively. The
increased use of funds of $9.3 million was primarily due to an increase of $8.7
million (27%) in loans funded during 1996 compared to the year ended December
31, 1995. Loans funded/purchased were $40.4 million during the year ended
December 31, 1996, as compared to $31.7 million for the year ended December 31,
1995. During 1995 the Company experienced a slowing trend in fundings due to a
potential lack of working capital in the latter part of the year which caused
commitments to slow. With the completion of the Private Placement, the
availability of working capital allowed the commitments and fundings of the
Company to increase.
The Company generated $49.7 million and $4.3 million from financing
activities during the years ended December 31, 1996 and 1995, respectively.
During 1995, the main source of funds was net proceeds from advances under the
Company's revolving credit facility ($7.9 million). During 1996, the main
sources of funds were $29.5 million received from the Notes and $34.5 million
received from the completion of the Offering. The Company's main use of funds
from financing activities are the payment of dividends as part of its
requirements to maintain REIT status. Dividends paid increased from $4.3
million during the year ended December 31, 1995, to $6.3 million during the
year ended December 31, 1996. This increase of $2.0 million corresponds to the
Company's increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans and, from
time to time, to acquire loans from governmental agencies and/or their agents.
The Company also uses funds for payment of dividends to shareholders,
management and advisory fees (in lieu of salaries and other administrative
overhead), general corporate overhead and interest and principal payments on
borrowed funds.
At December 31, 1996, the Company had $26.0 million of cash and cash
equivalents and approximately $45.8 million in outstanding commitments to
originate loans. Such commitments were made in the ordinary course of the
Company's business. These commitments to extend credit are conditioned upon
compliance with the terms of the commitment letter. Commitments have fixed
expiration dates and require payment of a fee. Since some commitments expire
without the proposed loan closing, the total committed amounts do not
necessarily represent future cash requirements. In general, to meet its
liquidity requirements, including expansion of its outstanding loan portfolio,
the Company intends to use: (i) its short-term credit facility as described
below, (ii) placement of long-term borrowings, (iii) issuance of debt
securities, and/or (iv) 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
18
<PAGE> 21
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.
By December 31, 1995, the Company had fully utilized the proceeds from its
IPO. During 1995, the Company completed an arrangement for a revolving credit
facility providing the Company with funds to originate loans collateralized by
commercial real estate. This credit facility provides the Company up to the
lesser of $20 million or an amount equal to 50% of the value of the underlying
property collateralizing the borrowings. At December 31, 1996, the Company had
no outstanding borrowings under the credit facility and $20 million available
thereunder. The Company is charged interest on the balance outstanding under
the credit facility at the Company's election of either the prime rate of the
lender less 50 basis points or 200 basis points over the 30, 60 or 90 day
LIBOR. Additional funds will be available to the Company from the proceeds of
the dividend reinvestment plan or SBA 504 loan takeouts. Management anticipates
these sources of funds will be adequate to meet its existing obligations.
On March 12, 1996 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 income on
these leveraged funds is materially dependent on the spread between the rate at
which it borrowed these funds (6.72%) and the rate obtained on loan of these
funds (presently the outstanding portfolio has a weighted average coupon of
approximately 11.1%).
In July 1996, the Company 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 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 (short-term borrowings)
through its existing credit facility and originate loans at a fixed rate of
interest.
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.
Loan demand has remained high for the types of loans originated by the
Company (see "Business - Loan Commitments"). The Private Placement and Offering
may not provide the Company with sufficient capital to expand the outstanding
portfolio at historical growth levels. Accordingly, the Company may seek
additional sources of financing during 1997. 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 these financing sources. If these sources are not available, the
Company will have to fully utilize its $20 million revolving credit facility,
increase its revolving credit facility and/or may have to slow the rate of
increasing the outstanding loan portfolio.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K
This Form 10-K 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
19
<PAGE> 22
operations, including plans and objectives relating to future growth of the
loan portfolio and availability of funds. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-K 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". Pursuant to SFAS No. 123, a company may elect to
continue expense recognition under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) or to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value methodology outlined in SFAS No.
123. SFAS No. 123 further specifies that companies electing to continue expense
recognition under APB No. 25 are required to disclose pro forma net income and
pro forma earnings per share as if the fair value based accounting prescribed
by SFAS No. 123 has been applied. The Company has elected to continue expense
recognition pursuant to APB No. 25. SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995.
In June 1996, the FASB issued 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.
In February 1997, 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 earnings per share data. 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 is not
considered 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 is not considered significant.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is hereby incorporated by
reference to the Company's Financial Statements beginning on page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 14, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 14, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 14, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 14, 1997.
21
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements -
See index to Financial Statements set forth on page F-1 of this
Form 10-K.
(2) Financial Statement Schedules -
All schedules are omitted because they are not required under
the related instructions or not applicable, or because the
required information is included elsewhere in the consolidated
financial statements or notes thereto.
(3) Exhibits
See Exhibit Index beginning on page E-1 of this Form 10-K.
(b) Reports on Form 8-K:
None
22
<PAGE> 25
GLOSSARY
The following terms as used on this Form 10-K are briefly defined below:
Average Annual Value The book value of total assets of the Company or
of All Assets any Person wholly-owned (directly or indirectly)
by the Company 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 The Common Equity Capital on the first day of the
Capital year and on the last day of each quarter of such
year, divided by five.
Average Quarterly Value The book value of total assets of the Company or
of All Assets 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 The book value of Invested Assets of the Company
All Invested Assets or any Person of 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 Common Equity Capital on the first day of the
Common Equity Capital quarter and on the last day of the quarter,
divided by two.
Common Equity Capital The sum of the stated capital plus the additional
paid-in capital for the Company's Common Shares
of Beneficial Interest.
GAAP Generally accepted accounting principles.
Independent Trust The trust managers of the Company who are not
Managers affiliated with PMC Capital or its subsidiaries.
Invested Assets The Primary Investments plus the Other
Investments.
Return on Average Equity Net income of the Company as determined in
accordance with GAAP, less Common Equity Capital
preferred dividends, if any, divided by the
Average Common Equity Capital.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Lance B. Rosemore
--------------------------------
Lance B. Rosemore, President
Dated March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ DR. ANDREW S. ROSEMORE Chairman of the Board of Trust March 21, 1997
- ----------------------------- Managers, Chief Operating
Dr. Andrew S. Rosemore Officer and Trust Manager
/S/ LANCE B. ROSEMORE President, Chief Executive March 21, 1997
- ----------------------------- Officer, Secretary and Trust
Lance B. Rosemore Manager (principal executive
officer)
/S/ BARRY N. BERLIN Chief Financial Officer (principal March 21, 1997
- ----------------------------- financial and accounting
Barry N. Berlin officer)
/S/ IRVING MUNN Trust Manager March 21, 1997
- -----------------------------
Irving Munn
/S/ ROY H. GREENBERG Trust Manager March 21, 1997
- -----------------------------
Roy H. Greenberg
/S/ NATHAN COHEN Trust Manager March 21, 1997
- -----------------------------
Nathan Cohen
/S/IRA SILVER Trust Manager March 21, 1997
- -----------------------------
Ira Silver
/S/ MARTHA GREENBERG Trust Manager March 21, 1997
- -----------------------------
Martha Greenberg
</TABLE>
24
<PAGE> 27
PMC COMMERCIAL TRUST
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants .................................... F-2
Financial Statements:
Consolidated Balance Sheets ..................................... F-3
Consolidated Statements of Income ............................... F-4
Consolidated Statements of Beneficiaries' Equity ................ F-5
Consolidated Statements of Cash Flows ........................... F-6
Notes to Consolidated Financial Statements ........................... F-7
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trust Managers
PMC Commercial Trust:
We have audited the accompanying consolidated balance sheets of PMC Commercial
Trust and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, beneficiaries' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PMC
Commercial Trust and subsidiaries as of December 31, 1996 and 1995, the
consolidated results of their operations and their cash flows for the each of
the years in the three year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 5, 1997
F-2
<PAGE> 29
PMC COMMERCIAL TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Investments:
Loans receivable, net ......................................................... $ 91,981 $ 59,129
Cash equivalents .............................................................. 25,952 174
Restricted investments ........................................................ 2,759 --
-------- --------
Total investments ............................................................... 120,692 59,303
-------- --------
Other assets:
Cash .......................................................................... 32 34
Interest receivable ........................................................... 615 410
Deferred borrowing costs ...................................................... 376 --
Other assets, net ............................................................. 34 50
-------- --------
Total other assets .............................................................. 1,057 494
-------- --------
Total assets .................................................................... $121,749 $ 59,797
======== ========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable ................................................................. $ 26,648 $ 7,920
Borrower advances ............................................................. 4,492 579
Dividends payable ............................................................. 2,495 1,519
Unearned commitment fees ...................................................... 1,160 600
Due to affiliates ............................................................. 625 845
Unearned construction monitoring fees ......................................... 185 81
Other liabilities ............................................................. 166 14
Interest payable .............................................................. 149 56
-------- --------
Total liabilities ............................................................... 35,920 11,614
-------- --------
Commitments and contingencies (Note 11)
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,085,495 and
3,491,716 shares issued and outstanding at December 31,
1996 and December 31, 1995, respectively ................................. 61 35
Additional paid-in capital .................................................... 86,249 48,327
Cumulative net income ......................................................... 15,288 8,111
Cumulative dividends .......................................................... (15,769) (8,290)
-------- --------
Total beneficiaries' equity ..................................................... 85,829 48,183
-------- --------
Total liabilities and beneficiaries' equity ..................................... $121,749 $ 59,797
======== ========
Net asset value per share ....................................................... $ 14.10 $ 13.80
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 30
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Interest income - loans ........................ $ 8,528 $ 5,610 $ 2,289
Interest and dividends - other investments ..... 1,235 325 1,222
Other income ................................... 385 295 180
---------- ---------- ----------
Total revenues ................................... 10,148 6,230 3,691
---------- ---------- ----------
Expenses:
Interest ....................................... 1,805 222 37
Advisory and servicing fees, net ............... 992 945 357
General and administrative ..................... 117 96 64
Legal and accounting fees ...................... 57 71 33
---------- ---------- ----------
Total expenses ................................... 2,971 1,334 491
---------- ---------- ----------
Net income ....................................... $ 7,177 $ 4,896 $ 3,200
========== ========== ==========
Weighted average shares outstanding .............. 4,755,289 3,451,091 3,430,009
========== ========== ==========
Net income per share ............................. $ 1.51 $ 1.42 $ 0.93
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 31
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
COMMON
SHARES OF ADDITIONAL CUMULATIVE TOTAL
BENEFICIAL PAR PAID-IN NET CUMULATIVE BENEFICIARIES'
INTEREST VALUE CAPITAL INCOME DIVIDENDS EQUITY
---------- --------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 ........... 3,099,530 $ 31 $ 42,895 $ 15 $ -- $ 42,941
Shares sold through
public offering ................ 345,000 3 5,172 -- -- 5,175
Issuance costs ...................... -- -- (362) -- -- (362)
Dividends ( $1.02 per share ) ....... -- -- -- -- (3,514) (3,514)
Net income .......................... -- -- -- 3,200 -- 3,200
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1994 ......... 3,444,530 34 47,705 3,215 (3,514) 47,440
Shares issued through exercise of
stock options .................. 12,996 -- 123 -- -- 123
Shares issued through dividend
reinvestment and cash
purchase plan .................. 34,190 1 499 -- -- 500
Dividends ($1.38 per share ) ........ -- -- -- -- (4,776) (4,776)
Net income .......................... -- -- -- 4,896 -- 4,896
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1995 ......... 3,491,716 35 48,327 8,111 (8,290) 48,183
Shares sold through public
offering, including
overallotments ................. 2,275,000 23 33,568 -- -- 33,591
Shares sold through
directed offering .............. 60,000 1 885 -- -- 886
Issuance costs ...................... -- -- (547) -- -- (547)
Shares issued through exercise of
stock options .................. 22,340 -- 234 -- -- 234
Shares issued through dividend
reinvestment and cash
purchase plan .................. 236,439 2 3,782 -- -- 3,784
Dividends ( $1.545 per share ) ...... -- -- -- -- (7,479) (7,479)
Net income .......................... -- -- -- 7,177 -- 7,177
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1996 ......... 6,085,495 $ 61 $ 86,249 $ 15,288 $ (15,769) $ 85,829
========= ========= ========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 32
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 7,177 $ 4,896 $ 3,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of:
Government securities .......................... -- -- (80)
Discount on purchased loans .................... (30) (26) (22)
Deferred commitment fees ....................... (283) (197) (166)
Construction monitoring fees ................... (140) (146) (40)
Amortization of organization and borrowing costs ... 83 8 8
Commitment fees collected, net ..................... 1,270 546 1,295
Construction monitoring fees collected, net ........ 244 8 259
Changes in operating assets and liabilities:
Accrued interest receivable .................... (205) (201) (209)
Other assets ................................... 7 (26) --
Borrower advances .............................. 3,913 (1,767) 2,346
Due to affiliates .............................. (220) 660 160
Other liabilities .............................. 152 14 (188)
Interest payable ............................... 93 56 --
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 12,061 3,825 6,563
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded and purchased ............................. (40,430) (31,711) (34,983)
Principal collected .................................... 7,181 4,992 4,863
Redemption of government securities .................... -- -- 5,000
Change in restricted investments ....................... (2,759) -- --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .................... (36,008) (26,719) (25,120)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ............... 38,286 582 5,175
Proceeds from issuance of notes payable ............... 39,040 9,130 --
Payment of principal on notes payable ................. (20,312) (1,210) --
Payment of dividends .................................. (6,294) (4,250) (2,480)
Payment of borrowing costs ............................ (450) -- --
Payment of issuance costs ............................. (547) -- (362)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 49,723 4,252 2,333
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 25,776 (18,642) (16,224)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............. 208 18,850 35,074
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ................... $ 25,984 $ 208 $ 18,850
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested .................................. $ 210 $ 40 $ --
======== ======== ========
Interest paid ......................................... $ 1,617 $ 165 $ 37
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 33
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Commercial Trust ("PMC Commercial") was organized on June 4, 1993,
as a Texas real estate investment trust created primarily to originate loans to
small business enterprises which are collateralized by first liens on real
estate. The shares of the Company are traded on the American Stock Exchange
(Symbol "PCC"). The Company follows the accounting practices prescribed in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts." The Company's principal investment objective is to obtain current
income from interest payments and other related fee income on collateralized
business loans. The Company's investment advisor is PMC Advisers, LTD. ("PMC
Advisers" or the "Investment Manager"), an indirect subsidiary of PMC Capital,
Inc. ("PMC Capital"), a regulated investment company traded on the American
Stock Exchange (symbol "PMC"). The Company intends to maintain its qualified
status as a real estate investment trust ("REIT") for Federal income tax
purposes.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF 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 (collectively, the "Company"). PMC
Commercial owns 100% of PMC Commercial Corp. and, directly or indirectly, all
of the partnership interests of PCR.
VALUATION OF INVESTMENTS:
Loans receivable are carried at their outstanding principal balance
less any discounts, deferred fees net of related costs, and loan loss reserves.
A loan loss reserve is established based on a determination, through an
evaluation of the recoverability of individual loans, by the Board of Trust
Managers when significant doubt exists as to the ultimate realization of the
loan. To date, no loan loss reserves have been established. The determination
of whether significant doubt exists and whether a loan loss provision is
necessary for each loan requires judgement and considers the facts and
circumstances existing at the evaluation date. Management's evaluation of the
adequacy of the allowance is based on a review of the Company's historical loss
experience, known and inherent risks in the loan portfolio, including adverse
circumstances that may affect the ability of the borrower to repay interest
and/or principal and to the extent payment appears impaired, the estimated
value of collateral. Changes to the facts and circumstances of the borrower,
the lodging industry and the economy may require the establishment of
additional loan loss reserves in proportion to the potential loss.
Deferred fee revenue is included in the carrying value of loans
receivable and consists of non-refundable fees less certain direct loan
origination costs which are being recognized over the life of the related loan
as an adjustment of yield.
DEFERRED BORROWING COSTS:
Costs incurred by the Company in connection with the issuance of notes
payable are being amortized over the life of the related obligation.
F-7
<PAGE> 34
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES:
The Company intends to maintain its qualified status as a REIT under
the provisions of the Internal Revenue Code of 1986, as amended (the "Code").
In order to remain qualified as a REIT under the Code, the Company must elect
to be a REIT and must satisfy various requirements in each taxable year,
including, among others, limitations on share ownership, asset diversification,
sources of income, and distribution of income. By qualifying, the Company will
not be subject to Federal income taxes to the extent that it distributes at
least 95% of its taxable income in the fiscal year. Management of the Company
believes it has satisfied the various requirements to remain qualified as a
REIT. Since inception, all of the Company's dividends have been paid out of
ordinary income.
INTEREST INCOME:
Interest income is recorded on the accrual basis to the extent that
such amounts are deemed collectible. The Company's policy is to suspend the
accrual of interest income when a loan becomes 60 days delinquent.
CONSOLIDATED STATEMENT OF CASH FLOWS:
The Company generally considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents for the purpose of the consolidated statement of cash flows.
PER SHARE DATA:
Net income per share is based on the weighted average number of common
shares of beneficial interest outstanding during the period.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS")
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation". Pursuant to SFAS No. 123, a
company may elect to continue expense recognition under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) or
to recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value methodology outlined in
SFAS No. 123. SFAS No. 123 further specifies that companies electing to
continue expense recognition under APB No. 25 are required to disclose pro
forma net income and pro forma earnings per share as if the fair value based
accounting prescribed by SFAS No. 123 has been applied. The Company has elected
to continue expense recognition pursuant to APB No. 25. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995.
In June 1996, the FASB issued 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.
In February 1997, 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 earnings per share data. 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 is not considered 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 is not considered significant.
RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to
current year presentation.
F-8
<PAGE> 35
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE:
The Company primarily originates loans: (i) to small business
enterprises that exceed the net worth, asset, income, number of employee or
other limitations applicable to the Small Business Administration ("SBA")
programs utilized by PMC Capital or (ii) in excess of $1.1 million to small
business enterprises without regard to SBA eligibility requirements. Such loans
are primarily collateralized by first liens on real estate and are subject to
the Company's underwriting criteria.
The principal amount of loans originated by the Company generally have
not exceeded 70% of the lesser of fair value or cost of the real estate
collateral unless credit enhancements such as additional collateral or third
party guarantees were obtained. Loans originated or purchased by the Company
typically provide interest payments at fixed rates, although the Company may
also originate and purchase variable rate loans. Loans generally have
maturities ranging from five to 20 years. Most loans provide for scheduled
amortization and often have a balloon payment requirement. In most cases,
borrowers are entitled to prepay all or part of the principal amount subject to
a prepayment penalty depending on the terms of the loan.
During the years ended December 31, 1996, 1995 and 1994, the Company
originated loans to 32, 31 and 38 corporations, partnerships or individuals for
approximately $40.4 million, $31.7 million and $33.6 million and collected
commitment fees of approximately $1.6 million, $546,000 and $1.3 million,
respectively.
During the year ended December 31, 1994, the Company purchased loans
with a face value of $1,502,000, for $1,325,000 from the U.S. Government and/or
its agents. The original discount of $177,000 on these loans is netted against
loans receivable and is being amortized over the remaining life of the loans on
the interest method. During the years ended December 31, 1996, 1995 and 1994,
approximately $30,000, $26,000 and $22,000, respectively, of the discount has
been recognized as interest income.
At December 31, 1996, approximately 32% of the Company's loan
portfolio consisted of loans to borrowers in Texas. No other state had a
concentration of 10% or greater at December 31, 1996. Approximately 32% and 12%
of the Company's loan portfolio as of December 31, 1995 consisted of loans to
borrowers in Texas and Maryland, respectively. No other state had a
concentration of 10% or greater at December 31, 1995. The Company's loan
portfolio was approximately 97% and 96% concentrated in the lodging industry at
December 31, 1996 and 1995, respectively. There can be no assurance that the
Company will continue to experience the positive results it has historically
achieved from these lending activities or that market conditions will enable
the Company to maintain or increase this level of loan concentration. Any
economic factors that negatively impact the lodging industry could have a
material adverse effect on the business of the Company. Additionally, a decline
in economic conditions in Texas may adversely affect the Company.
In connection with the origination of a loan, the Company charges a
commitment fee. In accordance with SFAS No. 91, this non-refundable fee, less
the direct costs associated with the origination, is deferred and is included
as a reduction of the carrying value of loans receivable. These net fees are
being recognized as income over the life of the related loan as an adjustment
of yield. The Company had approximately $1.4 million and $975,000 in deferred
commitment fees at December 31, 1996 and 1995, respectively.
NOTE 3. CASH EQUIVALENTS:
At December 31, 1996 cash equivalents were comprised of $19.0 million
in money market funds and savings deposits and $7.0 million in government
securities.
Government securities include the Company's investment in
mortgage-backed securities held by Federal Home Loan Mortgage Corporation (with
a face value of $5 million and a discount price of $4,980,972) and Federal
National Mortgage Association (with a face value of $2 million and a discount
price of $1,974,236). The Company's investments in government securities all
have maturities within 90 days.
F-9
<PAGE> 36
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRICTED INVESTMENTS:
Restricted investments include collection and reserve account balances
(approximately $733,000 and $1.9 million, respectively, at December 31, 1996)
maintained pursuant to a structured financing completed in March 1996 (see Note
12).
Additionally, the Company maintains funds ($101,000 at December 31,
1996) pursuant to a marketing agreement between the Company and U.S. Franchise
Systems, Inc. ("USFS"), a non-affiliated Delaware corporation, which became
effective April 12, 1996 (the "Marketing Agreement"). The Marketing Agreement
requires USFS to maintain funds equal to the greater of 2% of all loan
commitments made under the Marketing Agreement or $100,000 with the Company
into a reserve account (the "Reserve Account") for the purpose of
collateralizing the payment and performance of such loans and pay losses, if
any, suffered by the Company on uncollected loans. To the extent that the
Reserve Account balance exceeds the amount required, such excess amount will be
remitted by the Company to USFS on a quarterly basis.
NOTE 5. DUE TO AFFILIATE:
The investments of the Company are managed by PMC Advisers. Pursuant
to an investment management agreement between the Company and the Investment
Manager (the "Investment Management Agreement") which was in effect through
June 30, 1996, the Company was obligated to pay to the Investment Manager,
quarterly in arrears, a base fee (the "Base Fee") consisting of a quarterly
servicing fee of 0.125% of the average quarterly value of all assets (as
defined in the Investment Management Agreement), representing on an annual
basis approximately 0.5% of the average annual value of all assets (as defined
in the Investment Management Agreement), and a quarterly advisory fee of 0.25%
of the average quarterly value of all invested assets (as defined in the
Investment Management Agreement), representing on an annual basis approximately
1% of the average annual value of all invested assets (as defined in the
Investment Management Agreement). In addition, commencing January 1, 1994, for
each calendar year during which the Company's annual return on average equity
capital (as defined in the Investment Management Agreement) after deduction of
the Base Fee (the "Actual Return") exceeded 6.69% (the "Minimum Return"), the
Company was obligated to pay to the Investment Manager, as incentive
compensation, an additional advisory fee (the "Annual Fee") equal to the
product determined by multiplying the average annual value of all invested
assets (as defined in the Investment Management Agreement) by a percentage
equal to the difference between the Actual Return and the Minimum Return, up to
a maximum of one percent (1%) per annum. The Annual Fee was earned only to the
extent that the annual return on average common equity capital (as defined in
the Investment Management Agreement) after deduction of the Base Fee and Annual
Fee is at least equal to the Minimum Return. All such advisory fees were
reduced by fifty percent with respect to the value of Invested Assets that
exceed common beneficiaries' equity as a result of leverage.
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 as a cost of issuing its common shares, which has been included in
costs offset against additional paid-in capital in the accompanying December
31, 1996 consolidated balance sheet.
The quarterly servicing and advisory fee (the "Base Fee") was also
revised 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 of beneficial interest ("Common Shares") by the Company (other than
pursuant to the Company's dividend
F-10
<PAGE> 37
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DUE TO AFFILIATE: (CONTINUED)
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.
Pursuant to the applicable Investment Management Agreement, the
Company incurred an aggregate of $1.6 million, $1.2 million and $429,000 in
management fees during the years ended December 31, 1996, 1995 and 1994,
respectively, $251,000 of which were offset against additional paid-in capital
during the year ended December 31, 1996. Of the total management fees paid or
payable to the Investment Manager during the years ended December 31, 1996,
1995 and 1994, $318,500, $244,000 and $71,500, respectively, has been offset
against commitment fees as a direct cost of originating loans (see Note 2).
Management fees of $754,000 incurred during the six months ended June
30, 1996 (pursuant to the Investment Management Agreement) were calculated
based upon average invested assets of $63.8 million, average total assets of
$74.0 million and average beneficiaries equity of $49.1 million during the six
months ended June 30, 1996. Management fees of $557,000 incurred during the six
months ended December 31, 1996, were calculated pursuant to the amended
Investment Management Agreement, based upon the Average Quarterly Value of All
Invested Assets of $80.7 million, and the Average Quarterly Value of Common
Equity Capital of $51.5 million during the six months ended December 31, 1996.
Management fees incurred during the year ended December 31, 1995 were
calculated based upon average invested assets of $46.8 million, average total
assets of $53.9 million and average beneficiaries' equity of $47.9 million
during the year ended December 31, 1995.
NOTE 6. BORROWER ADVANCES:
The Company finances projects during the construction phase. At
December 31, 1996 and 1995, the Company was in the process of funding
approximately $28.6 million and $15.9 million in construction projects,
respectively, of which $16.5 million and $9.2 million, respectively, remained
unfunded. As part of the monitoring process to verify that the
borrowers' cash equity is utilized for its intended purpose, the Company
receives funds from the borrowers and releases funds upon presentation of
appropriate supporting documentation. At December 31, 1996 and 1995, the
Company had approximately $4.5 million and $579,000, respectively, in funds
held on behalf of borrowers, which is included as a liability in the
accompanying consolidated balance sheets. The Company will use cash, cash
equivalents, government securities or available advances under its revolving
credit facility to fund these obligations.
NOTE 7. NET INCOME PER SHARE:
The weighted average number of common shares of beneficial interest
outstanding were 4,755,289, 3,451,091 and 3,430,009 for the periods ended
December 31, 1996, 1995 and 1994, respectively. The years ended December 31,
1996, 1995 and 1994 were not affected by outstanding options, as such options
were anti-dilutive or immaterial (see Note 10).
NOTE 8. BENEFICIARIES' EQUITY:
On July 2, 1996, PMC Commercial completed the sale of two million of
its Common Shares in a public offering and 60,000 Common Shares directly to
certain officers and trust managers of PMC Commercial. The net proceeds to PMC
Commercial from these issuances were $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 (collectively with the previous
issuances, the "Offering"). The proceeds of the Offering are being used to
originate additional loans in accordance with PMC Commercial's underwriting
criteria. In connection with the Offering, PMC Commercial incurred
approximately $547,000 in costs which were offset against additional paid-in
capital.
F-11
<PAGE> 38
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. BENEFICIARIES' EQUITY: (CONTINUED)
As part of the requirements of qualifying for REIT status under the
Code, the Company must distribute to its shareholders at least 95% of its
income for Federal income tax purposes ("Taxable Income") within established
time requirements of the Code. If these requirements are not met, the Company
will be subject to Federal income taxes and/or excise taxes. As a result of a
timing difference for the recognition of income with respect to fees collected
at the inception of originating loans, the Company's Taxable Income exceeds net
income in accordance with generally accepted accounting principals ("GAAP"). In
order to prevent incurring any tax liability, the Company has declared or
distributed the required amount of taxable income as dividends to its
shareholders. For Federal income tax purposes, these dividends do not represent
a return of capital.
NOTE 9. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN:
The Company filed a registration statement in 1995 with the Securities
and Exchange Commission to implement its dividend reinvestment and cash
purchase plan (the "Plan"). Participants in the Plan have the option to reinvest
all or a portion of dividends received plus an optional cash purchase of up to
$10,000 per month. The purchase price of the shares if 98% of the average of the
high and low price of the common stock as published for the five trading days
immediately prior to the dividend record date or prior to the optional cash
payment purchase date, whichever is applicable. During the years ended December
31, 1996 and 1995, 236,439 and 34,190 shares, respectively, were issued pursuant
to the plan.
NOTE 10. SHARE OPTION PLANS:
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 provides an alternative for employers to either
recognize employee stock compensation expense using a new fair value based
method with no pro forma information required or to continue applying the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25") for
expense recognition and disclose the pro forma affects on net income and
earnings per share using the new fair value method. The Company has elected to
continue expense recognition pursuant to APB No. 25.
The Company has two stock-based compensation plans in the form of the
1993 Employee Share Option Plan (the "Employee Plan") and the Trust Manager
Share Option Plan (the "Trust Manager Plan"), referred to collectively as the
"Stock Option Plans." Pursuant to the Stock Option Plans, the Company is
authorized to grant stock options up to an aggregate of 6% of the total number
of Common Shares outstanding at any time (a maximum of 365,129 shares at
December 31, 1996) as incentive stock options (intended to qualify under
Section 422 of the Internal Revenue code of 1986, as amended) and/or as options
that are not intended to qualify as incentive stock options. In 1995 and 1996,
the Company granted both qualified and nonqualified stock options under the
Stock Option Plans.
The Stock Option Plans provide that the exercise price of any stock
option may not be less than the fair market value of the Common Stock on the
date of grant. All stock options granted in 1995 and 1996 have an exercise
price equal to the fair market value of the underlying stock as of the date of
grant and a contractual term of five years. Of the total options outstanding,
12,000 options granted in December 1995 fully vest in January 1997 and 11,850
options granted in December 1996 fully vest in January 1998. The remainder
fully vest on the first anniversary date of grant. The Company granted 40,350
and 24,880 options during the years ended December 31, 1996 and 1995,
respectively. In accordance with APB No. 25, the Company has not recognized
compensation expense for the stock options granted in 1996 and 1995.
F-12
<PAGE> 39
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHARE OPTION PLANS: (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------------------------------- -----------------------------------
NUMBER OF SHARES WEIGHTED AVERAGE NUMBER OF SHARES WEIGHTED AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding January 1 .................. 72,315 $ 13.43 71,540 $ 12.12
Granted ................................ 40,350 $ 16.79 24,880 $ 15.68
Exercised .............................. (27,846) $ 11.88 (12,996) $ 11.88
Forfeited .............................. (6,290) $ 11.88 (11,109) $ 11.88
-------- --------
Outstanding December 31 ................ 78,529 $ 15.83 72,315 $ 13.43
======== ========
Exercisable at December 31 ............. 21,239 $ 14.08 15,665 $ 13.01
======== ========
Weighted-average fair value of
options granted during the year..... $ 1.00 $ 0.86
======== ========
</TABLE>
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995: dividend yield of 9%
for both years; expected volatility of 16.26% for both years; risk-free
interest rates are different for each grant and range from 5.49% to 6.48%; and
the expected lives of options are assumed to be 5 years (the full term of the
options).
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
NUMBER WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACT LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ------------ ------------- ------------------ ------------ ------------------
<C> <C> <C> <C> <C> <C>
$11.00 to $14.99 10,299 2.87 $12.60 10,299 $12.60
$15.00 to $17.063 68,230 4.39 $16.32 10,940 $15.48
- ----------------- ------ ---- ------ ------ ------
$11.00 to $17.063 78,529 4.19 $15.83 21,239 $14.08
====== ======
</TABLE>
The pro forma effects on net income and earnings per share for 1996
and 1995 from compensation expense computed pursuant to SFAS No. 123 is as
follows (in thousands except per share date):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
AS REPORTED PRO FORMA AS REPORTED PROFORMA
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
SFAS No. 123 Charge $ - $ 20 $ - $ 1
APB No. 25 Charge $ - $ - $ - $ -
Net Income $ 7,177 $ 7,157 $ 4,896 $ 4,895
Earnings Per Common Share $ 1.51 $ 1.51 $ 1.42 $ 1.42
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1995.
F-13
<PAGE> 40
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHARE OPTION PLANS: (CONTINUED)
EMPLOYEES PLAN:
As of December 31, 1996, 119,320 share options had been granted since
the inception of the plan. In December 1994, the Board of Trust Managers
allowed the officers and employees holding existing options to elect to
participate in an exchange of options as of December 10, 1994, whereby the
then-outstanding options could be canceled and, in lieu thereof, new options
could be granted at an exchange rate of 0.6 new shares per share previously
granted. As a result, 39,400 options were canceled and 23,640 new options were
issued.
TRUST MANAGERS PLAN:
Only the trust managers who are not employees of PMC Capital or the
Investment Manager (the " Non-employee Trust Managers") are eligible to
participate in the Trust Managers Plan. The Trust Managers Plan is a
nondiscretionary plan pursuant to which options to purchase 2,000 shares are
granted to each Non-employee Trust Manager on the date such trust manager takes
office. In addition, options to purchase 1,000 shares are granted each year
thereafter on the anniversary of the date the trust manager took office so long
as such trust manager is re-elected to serve as a trust manager. Such options
will be exercisable at the fair market value of the shares on the date of
grant. The options granted under the Trust Managers Plan become exercisable one
year after date of grant and expire if not exercised on the earlier of (i) 30
days after the option holder no longer holds office as an Non-employee Trust
Manager for any reason or (ii) within five years after date of grant. The
number of shares exercisable at December 31, 1996 and 1995 were 11,000 and
8,000, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES:
Commitments to extend credit are agreements to lend to a customer
provided the terms established in the contract are met. The Company had
approximately $19.3 million of loan commitments outstanding to 15 corporations,
partnerships or individuals in the lodging industry at December 31, 1996. The
weighted average contractual interest rate on these loan commitments at
December 31, 1996 was 10.73%. In addition, the Company had approximately $16.5
million of loan commitments outstanding on 17 partially funded construction
loans and approximately $10.0 million of loan commitments outstanding on 14 SBA
504 Program loans at December 31, 1996. The above 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 generally have fixed
expiration dates and require payment of a fee. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. To the extent the Company
has available funds, an additional $7.2 million in commitments in the lodging
industry presently issued by the Investment Manager, with a weighted average
interest rate of 10.64% will be funded by the Company. Pursuant to the
Investment Management Agreement, should the Company not have funds available
for commitments, such commitments will be referred to affiliated entities.
In the normal course of business, the Company is subject to various
proceedings and claims, the resolution of which will not, in management's
opinion, have a material adverse effect on the Company's financial position or
results of operations.
NOTE 12. NOTES PAYABLE:
The Company has a revolving credit facility which provides funds to
originate loans collateralized by commercial real estate up to the lesser of
$20 million or an amount equal to 50% of the value of the underlying property
collateralizing the borrowings. At December 31, 1996, the Company had no debt
outstanding under the credit facility with availability of $20 million. At
December 31, 1995, the Company had $7.9 million outstanding under the credit
facility with availability of an additional $12.1 million. The Company is
charged interest on the balance outstanding under the credit facility, at the
option of the Company, at either the prime rate of the lender less 50 basis
points or 200 basis points over the 30, 60 or 90 day LIBOR. At December 31,
1995, the weighted average interest rate on short-term borrowings under the
revolving credit facility was 8.2%.
F-14
<PAGE> 41
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. NOTES PAYABLE: (CONTINUED)
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
have a stated maturity in 2016 and bear interest at the rate of 6.72% per
annum, were collateralized by approximately $39.7 million of loans contributed
by PMC Commercial to the Partnership at inception (of which $36.7 million
remained outstanding at December 31, 1996). In connection with this private
placement, the Notes were given a rating of "AA" by Duff & Phelps Credit Rating
Co. 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 (pursuant to the terms of the trust
indenture established by the noteholders, the Company and the Partnership (the
"Trust Indenture") on the accompanying consolidated balance sheets. With regard
to all loans which were transferred to the Partnership, all payments of
principal and interest are to be deposited into the Partnership and are used to
pay the noteholders the monthly principal and interest due on the notes
pursuant to the Trust Indenture prior to releasing any funds to the Partnership
free and clear of the Trust Indenture. The Trust Indenture provides for several
covenants which would require, under certain circumstances, that the excess
cash, after payment of the required principal and interest to the Note holders,
be retained in the Reserve Account until the covenants are in
compliance.The net proceeds from the issuance of the Notes (approximately $27.1
million after giving effect to costs of approximately $451,000 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 $10.3 million in outstanding borrowings under
its revolving credit facility and to originate loans in accordance with its
underwriting criteria. Approximately $26.7 million remained outstanding under
the Notes at December 31, 1996.
All principal collected on the underlying loans during the monthly
period (as defined in the Trust Indenture) are used to make the required
principal payment on the first business day of the following month.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by SFAS No. 107 differ from
the value of the financial assets and liabilities determined by the trust
managers primarily as a result of the effects of discounting future cash flows.
Considerable judgement is required to interpret market data and develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts of the Company could realize in a current
market exchange or the amount that ultimately will be realized by the Company
upon maturity or disposition.
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Loans receivable, net $91,981 $94,152 $59,129 $60,505
Cash and Cash equivalents 25,984 25,984 207 207
LIABILITIES:
Notes payable 26,648 26,390 7,920 7,920
</TABLE>
Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent loans
on the estimation of the fair values described above is not considered
to have a material effect and accordingly, delinquent loans have been
disregarded in the valuation methodologies employed.
F-15
<PAGE> 42
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Cash and Cash equivalents: The carrying amount is a reasonable
estimation of fair value.
Notes payable: The estimated fair value is based on present value
calculation based on prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.
NOTE 14. QUARTERLY FINANCIAL DATA: (UNAUDITED)
The following represents selected quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring adjustments) necessary for fair presentation.
<TABLE>
1996
- -----------------------------------------------------------------------
Earnings Per
Revenues Net Income Share
----------- ----------- ------------
<S> <C> <C> <C>
First Quarter ........... $ 1,906,786 $ 1,344,470 $ 0.38
Second Quarter .......... 2,225,772 1,314,347 0.37
Third Quarter ........... 2,938,520 2,178,119 0.37
Fourth Quarter .......... 3,077,048 2,340,248 0.39
----------- ----------- -----------
$10,148,126 $ 7,177,184 $ 1.51
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
- -----------------------------------------------------------------------
Earnings Per
Revenues Net Income Share
----------- ----------- ------------
<S> <C> <C> <C>
First Quarter ........... $1,421,548 $1,185,124 $ 0.34
Second Quarter .......... 1,414,668 1,128,282 0.33
Third Quarter ........... 1,591,744 1,254,743 0.36
Fourth Quarter .......... 1,802,455 1,327,875 0.39
---------- ---------- -----------
$6,230,415 $4,896,024 $ 1.42
========== ========== ===========
</TABLE>
F-16
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
*3.1 Declaration of Trust
*3.1(a) Amendment No. 1 to Declaration of Trust
**3.1(b) Amendment No. 2 to Declaration of Trust
*3.2 Bylaws
*4. Instruments defining the rights of security holders. The
instruments filed in response to items 3.1 and 3.2 are
incorporated in this item by reference.
***10.1 Investment Management Agreement between the Company and PMC
Advisers, Inc.
*10.2 1993 Employee Share Option Plan
*10.3 1993 Trust Manager Share Option Plan
*10.4 Form of Dividend Reinvestment Plan
*10.5 Loan Origination Agreement
****10.6 Revolving Credit Facility
****10.7 Structured Financing
21 Subsidiary of the Registrant
27 Financial Data Schedule
</TABLE>
- -------------
* Previously filed as an exhibit to the Company's Registration Statement of
Form S-11 filed with the Commission on June 25, 1993, as amended
(Registration No. 33-65910), and incorporated herein by reference.
** Previously filed with the commission as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.
*** Filed herewith
**** Previously filed with the Commission as an exhibit to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1996.
E-1
<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
-2-
<PAGE> 3
(iii) invest in real estate (collectively, the "Other Investments"). At least
75% of the assets of the Company will be invested in the Primary Investments
and up to 25% of the assets of the Company may be invested by the Company in
Other Investments provided that such Other Investments do not affect the
ability of the Company to maintain its qualification as a real estate
investment trust under the 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
-3-
<PAGE> 4
detail as the trust managers deem appropriate in order to enable the
Company to determine that its investment policies are being observed
and implemented;
(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.
-4-
<PAGE> 5
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.
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
-5-
<PAGE> 6
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 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
-6-
<PAGE> 7
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.
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
-8-
<PAGE> 9
may be mutually agreeable to PMC Capital and the Company. The "Non-Compete
Percentage" shall be equal to 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
-9-
<PAGE> 10
vote of the independent directors of the Investment Manager. Any term or
provision of this Agreement may be waived, but only in writing by the party
which is entitled to the benefit of that provision. No waiver by any party of
any default with respect to any provision, condition or requirement hereof
shall be deemed to be a continuing waiver in the future thereof or a waiver of
any other provision, condition or requirement hereof; nor shall any delay or
omission of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.
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, the Investment Manager
hereby
-12-
<PAGE> 13
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: \s\
-------------------------------------------
Andrew S. Rosemore
Chairman of the Board and
Executive Vice President
PMC ADVISERS, INC.
By: \s\
-------------------------------------------
Lance B. Rosemore
President
PMC CAPITAL, INC.
By: \s\
-------------------------------------------
Lance B. Rosemore
President
-13-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE
OF
COMPANY INCORPORATION
------- -------------
<S> <C>
PMC Commercial Limited Partnership Delaware
PMC Commercial Corp. Delaware
</TABLE>
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10K OF PMC COMMERICAL TRUST AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 32
<SECURITIES> 25,952
<RECEIVABLES> 92,596<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 121,749<F2>
<CURRENT-LIABILITIES> 9,272<F3>
<BONDS> 26,648
0
0
<COMMON> 86,310
<OTHER-SE> (481)
<TOTAL-LIABILITY-AND-EQUITY> 121,749
<SALES> 0
<TOTAL-REVENUES> 10,148
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,805
<INCOME-PRETAX> 7,177
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,177
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<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) Deferred borrowing costs $ 376
(ii) Restricted investments 2,759
(iii) Other assets, net 34
------
$3,169
======
<F3>Includes the following:
(i) Dividends payable $2,495
(ii) Other liabilities 166
(iii) Interest payable 149
(iv) Borrower advances 4,492
(v) Unearned Commitment fees 1,160
(vi) Due to affiliates 625
(vii) Unearned construction
monitoring fees 185
------
$9,272
======
</FN>
</TABLE>
