<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-22148
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PMC COMMERCIAL TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-6446078
- --------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17290 Preston Road, 3rd Floor,
Dallas, TX 75252 (972) 349-3200
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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As of November 3, 1997, Registrant had outstanding 6,333,442 Common Shares of
Beneficial Interest, par value $.01 per share.
<PAGE> 2
PMC COMMERCIAL TRUST AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Income (Unaudited) -
Nine Months Ended September 30, 1997 and 1996 3
Three Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
PART I
Financial Information
ITEM 1. Financial Statements
1
<PAGE> 4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 109,134 $ 91,981
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,708 25,952
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . 3,991 2,759
--------- ---------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,833 120,692
--------- ---------
Other assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 32
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691 615
Deferred borrowing costs, net . . . . . . . . . . . . . . . . . . . . . . . 379 376
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 34
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,139 1,057
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117,972 $ 121,749
========= =========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,094 $ 26,648
Borrower advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,924 4,492
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,647 2,495
Unearned commitment fees . . . . . . . . . . . . . . . . . . . . . . . . . 909 1,160
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 625
Unearned construction monitoring fees . . . . . . . . . . . . . . . . . . . 124 185
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 149
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 166
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,338 35,920
--------- ---------
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,301,556 and
6,085,495 shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively . . . . . . . . . . . . . . . 63 61
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 89,969 86,249
Cumulative net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,041 15,288
Cumulative dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,439) (15,769)
--------- ---------
Total beneficiaries' equity . . . . . . . . . . . . . . . . . . . . . . . . . 89,634 85,829
--------- ---------
Total liabilities and beneficiaries' equity . . . . . . . . . . . . . . . . $ 117,972 $ 121,749
========= =========
Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.22 $ 14.10
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 5
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Interest income - loans . . . . . . . . . . . . . . . . . $ 9,126 $ 5,941
Interest and dividends - other investments . . . . . . . 603 824
Other income . . . . . . . . . . . . . . . . . . . . . . 593 306
----------- ------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . 10,322 7,071
----------- ------------
Expenses:
Interest . . . . . . . . . . . . . . . . . . . . . . . . 1,295 1,301
Advisory and servicing fees, net . . . . . . . . . . . . 1,073 800
General and administrative . . . . . . . . . . . . . . . 114 94
Provision for loan losses . . . . . . . . . . . . . . . . 50 --
Legal and accounting fees . . . . . . . . . . . . . . . . 38 39
----------- ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 2,570 2,234
----------- ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 7,752 $ 4,837
=========== ============
Weighted average shares outstanding . . . . . . . . . . . . 6,204,019 4,324,154
=========== ============
Net income per share . . . . . . . . . . . . . . . . . . . $ 1.25 $ 1.12
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Interest income - loans . . . . . . . . . . $ 3,126 $ 2,186
Interest and dividends - other investments. 144 565
Other income . . . . . . . . . . . . . . . 155 187
------------ ------------
Total revenues . . . . . . . . . . . . . . . 3,425 2,938
------------ ------------
Expenses:
Interest . . . . . . . . . . . . . . . . . 397 516
Advisory and servicing fees, net . . . . . 373 193
General and administrative . . . . . . . . 37 38
Provision for loan losses . . . . . . . . . 10 --
Legal and accounting fees . . . . . . . . . -- 13
------------ ------------
Total expenses . . . . . . . . . . . . . . . 817 760
------------ ------------
Net income . . . . . . . . . . . . . . . . . $ 2,608 $ 2,178
============ ============
Weighted average shares outstanding . . . . . 6,275,213 5,859,901
============ ============
Net income per share . . . . . . . . . . . . $ 0.42 $ 0.37
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,752 4,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount and fees . . . . . . . . . . . . . (651) (542)
Amortization of organization and borrowing costs . . . . 40 59
Provision for loan losses . . . . . . . . . . . . . . . 50 --
Commitment fees collected, net . . . . . . . . . . . . . 495 1,198
Construction monitoring fees collected, net . . . . . . 53 218
Changes in operating assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . (76) (74)
Other assets . . . . . . . . . . . . . . . . . . . . (44) (47)
Interest payable . . . . . . . . . . . . . . . . . . (37) (56)
Borrower advances . . . . . . . . . . . . . . . . . (569) 3,089
Due to affiliates . . . . . . . . . . . . . . . . . (285) (833)
Other liabilities . . . . . . . . . . . . . . . . . 23 33
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . 6,751 7,882
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded . . . . . . . . . . . . . . . . . . . . . . . . (35,878) (26,587)
Principal collected . . . . . . . . . . . . . . . . . . . . 18,466 5,301
Investment in restricted investments, net . . . . . . . . . (1,232) (2,503)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . (18,644) (23,789)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares . . . . . . . . . . 3,386 36,996
Proceeds from issuance of notes payable . . . . . . . . . . -- 39,141
Payment of dividends . . . . . . . . . . . . . . . . . . . (7,165) (4,077)
Payment of principal on notes payable . . . . . . . . . . . (6,554) (19,213)
Payment of borrowing costs . . . . . . . . . . . . . . . . -- (450)
Payment of issuance costs . . . . . . . . . . . . . . . . . (16) (552)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . (10,349) 51,845
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . (22,242) 35,938
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . 25,984 207
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . $ 3,742 $ 36,145
======== ========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested . . . . . . . . . . . . . . . . . . . $ 352 $ 119
======== ========
Dividends declared, not paid . . . . . . . . . . . . . . . $ 2,647 $ 2,308
======== ========
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 1,286 $ 1,306
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 8
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Commercial Trust
("PMC Commercial") and its subsidiaries (collectively, the "Company") as of
September 30, 1997, the consolidated statements of income for the three and
nine months ended September 30, 1997 and 1996, and the consolidated statements
of cash flows for the nine months ended September 30, 1997 and 1996 have not
been audited by independent accountants. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the Company's financial position at September 30, 1997, the
results of operations for the three and nine months ended September 30, 1997
and 1996, and the cash flows for the nine months ended September 30, 1997 and
1996. These adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1996 Annual
Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The results for the nine months ended September 30, 1997 are not
necessarily indicative of future financial results.
NOTE 2. BASIS FOR CONSOLIDATION:
On March 7, 1996, PMC Commercial Receivable Limited Partnership, a
Delaware limited partnership ("PCR" or "the Partnership"), and PMC Commercial
Corp., a Delaware corporation, were formed to engage in the private placement
of debt securities. PMC Commercial Corp. is the general partner of PCR. The
consolidated financial statements include the accounts of PMC Commercial, PMC
Commercial Corp. and PCR. PMC Commercial owns 100% of PMC Commercial Corp. and
directly or indirectly all of the partnership interests of PCR (see Note 5).
NOTE 3. DIVIDENDS TO BENEFICIARIES:
During the three and nine months ended September 30, 1997, PMC
Commercial declared dividends to its shareholders of $0.42 and $1.23 per share,
respectively.
6
<PAGE> 9
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DUE TO AFFILIATE:
Pursuant to an investment management agreement (the "Investment
Management Agreement") between the Company and PMC Advisers, Ltd., an
affiliated entity (the "Investment Manager"), the Company incurred fees of
approximately $1,203,000 for the nine months ended September 30, 1997. Of the
servicing and advisory fees paid or payable to the Investment Manager as of
September 30, 1997, $130,000 has been offset against commitment fees as a
direct cost of originating loans.
Pursuant to the amended Investment Management Agreement which became
effective July 1, 1996, based on terms as defined therein, the quarterly
servicing and advisory fee (the "Management Fee") is equal to (i) 0.4167%
(1.67% on an annual basis) of the lesser of (a) the Average Quarterly Value of
Common Equity Capital or (b) the Average Quarterly Value of All Invested Assets
and (ii) 0.21875% (0.875% on an annual basis) of the difference between the
Average Quarterly Value of All Invested Assets and the Average Quarterly Value
of Common Equity Capital. For purposes of calculating the Management Fee, the
Average Quarterly Value of Common Equity Capital was not increased by the
proceeds received from any public offering of common shares by the Company
(other than pursuant to the Company's dividend reinvestment plan) during the
180 day period ended December 31, 1996. Beginning January 1, 1997, the Average
Quarterly Value of Common Equity Capital includes $34.5 million of proceeds
received from a public offering of 2,335,000 Common Shares of Beneficial
Interest completed by PMC Commercial during July 1996 (the "Offering"). The
Investment Management Agreement provides that in no event will the aggregate
annual fees charged under the amended agreement be greater than that which
would have been charged had there been no amendment thereto.
NOTE 5. NOTES PAYABLE:
On March 12, 1996, the Partnership, a special purpose affiliate of PMC
Commercial, completed a private placement (the "Private Placement") of $29.5
million of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes"). The
Notes, issued at par, have a stated maturity in 2016, bear interest at the rate
of 6.72% per annum and are collateralized by loans contributed by PMC
Commercial to the Partnership of which $28.8 million remained outstanding at
September 30, 1997. Approximately $20.1 million of Notes remained outstanding
at September 30, 1997.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share. SFAS No. 128 is designed to
improve the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of PMC Commercial's earnings per
share data to that of similar entities.
7
<PAGE> 10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS: (CONTINUED)
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 the Company's earnings per share will not be significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on the Company's financial
position or results of operations will not be significant.
8
<PAGE> 11
PART I
Financial Information
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
PMC Commercial was organized in June 1993. From December 28, 1993
(commencement of operations) through September 30, 1997, PMC Commercial funded
an aggregate principal amount (including approximately $1.3 million of
purchased loans) of approximately $146.4 million related to 137 loans. During
the three and nine months ended September 30, 1997, the Company funded loans of
approximately $9 million and $36 million, respectively, and collected
commitment fees of approximately $116,000 and $495,000, respectively. During
the years ended December 31, 1996 and 1995, PMC Commercial originated and
funded loans of approximately $40.4 million and $31.7 million, respectively,
and collected commitment fees of approximately $1.3 million and $546,000,
respectively.
As of September 30, 1997, the total loan portfolio outstanding was
$110.9 million ($109.1 million after reductions for loans purchased at a
discount and deferred commitment fees) with a weighted average contractual
interest rate of approximately 11.0%. The weighted average contractual interest
rate does not include the effects of the amortization of discount on purchased
loans or commitment fees on funded loans. Generally, these loans are
collateralized by first liens on real estate and guaranteed by the principals
of the businesses financed. Included in principal outstanding at September 30,
1997 is $4.5 million of interim financing which has been advanced pursuant to
the Small Business Administration Section 504 Loan Program (the "SBA 504
Program"). Interest rates charged on such advances are comparable to those
customarily charged by the Company.
At September 30, 1997, the Company's loan portfolio consisted of
approximately 27% and 11% of loans to borrowers in Texas and Maryland,
respectively. No other state had a concentration of 10% or greater at September
30, 1997. The Company's loan portfolio was approximately 97% concentrated in
the lodging industry at September 30, 1997.
When originating a loan, PMC Commercial charges a commitment fee. In
accordance with SFAS No. 91, this non-refundable fee, less direct costs
associated with the origination, is deferred and included as a reduction of the
carrying value of loans receivable. These net deferred commitment fees are
recognized as an adjustment of yield over the life of the related loan. The
Company had approximately $1.6 million in net unamortized deferred commitment
fees at September 30, 1997.
From inception through September 30, 1997, PMC Commercial experienced
no loan charge-offs. At September 30, 1997, no loan was delinquent for a period
greater than 60 days.
All loans originated by PMC Commercial presently provide for fixed
interest rates. The weighted average interest rates for loans funded during the
nine months ended September 30, 1997, and the years ended December 31, 1996,
1995 and 1994 were 10.71%, 10.86%, 11.42%, and 11.05%, respectively.
9
<PAGE> 12
CERTAIN ACCOUNTING CONSIDERATIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The Company follows the accounting practices prescribed by the
American Institute of Certified Public Accountants - Accounting Standards
Division in Statement of Position 75-2 "Accounting Practices of Real Estate
Investment Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Company's Board of Trust Managers
when significant doubt exists as to the ultimate collectability of one or more
loans. The determination of whether significant doubt exists and whether a loss
provision is necessary for each loan requires judgment and consideration of the
facts and circumstances existing at the evaluation date. Changes to the facts
and circumstances of the borrower, the lodging industry and the economy may
require the establishment of significant loss reserves. At such time as a
determination is made that there exists significant doubt as to the ultimate
collectability of one or more loans requiring increases to the loss reserve,
the effect to operating results may be material. At September 30, 1997, the
Company had a $50,000 loan loss reserve.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
The net income of the Company during the nine months ended September
30, 1997 and 1996, was $7.8 million and $4.8 million, $1.25 and $1.12 per
share, respectively. The Company's earnings per share during the nine months
ended September 30, 1997 and 1996 includes the effect of the issuance of
2,335,000 of the Company's common shares of beneficial interest (the "Common
Shares") issued pursuant to the Offering in July 1996 and pursuant to stock
issuances under the Company's Dividend Reinvestment and Share Purchase Plan.
Accordingly, the Company's weighted average shares outstanding increased by
43%, from 4,324,154 during the nine months ended September 30, 1996 to
6,204,019 during the nine months ended September 30, 1997.
Interest income - loans increased by $3.2 million (54%), from $5.9
million during the nine months ended September 30, 1996, to $9.1 million during
the nine months ended September 30, 1997. This increase was primarily
attributable to the reallocation of the Company's initial investment of the
proceeds from the Private Placement in March 1996 and the Offering in July 1996
from cash and government securities to higher-yielding loans to small
businesses. The average monthly invested assets in loans to small businesses
increased by $35.6 million (53%), from $67.5 million during the nine months
ended September 30, 1996, to $103.1 million during the nine months ended
September 30, 1997. The annualized average yields on loans, including all loan
fees earned, for the nine months ended September 30, 1997 and 1996 were
approximately 12.4% and 12.1%, respectively. The increased yield was primarily
a result of the recognition of prepayment fees (included in other income as
discussed below) and the remaining unamortized deferred fees as income on loan
prepayments. During the nine months ended September 30, 1997, approximately
$13.5 million on 14 loans was paid in full with a corresponding recognition of
approximately $253,000 of deferred fee
10
<PAGE> 13
income. Interest income - loans includes interest earned on loans, the
accretion of a discount on purchased loans (approximately $24,000 and $22,000
during the nine months ended September 30, 1997 and 1996, respectively) and the
accretion of deferred commitment fees (approximately $513,000 and $191,000
during the nine months ended September 30, 1997 and 1996, respectively).
Interest and dividends - other investments decreased by $221,000
(27%), from $824,000 during the nine months ended September 30, 1996, to
$603,000 during the nine months ended September 30, 1997. This decrease was due
to a reduction in funds available for short-term investments during the nine
months ended September 30, 1997. The proceeds from the Private Placement in
March 1996 and from the Offering in July 1996 were initially invested in
short-term investments and are being used to make loans in accordance with the
Company's underwriting criteria. The average monthly short-term investments of
the Company decreased by $7.2 million (32%), from $22.2 million during the nine
months ended September 30, 1996, to $15.0 million during the nine months ended
September 30, 1997. The average yields on short-term investments during the
nine months ended September 30, 1997 and 1996 were approximately 5.4% and 5.0%,
respectively.
Other income increased by $287,000 (94%), from $306,000 during the
nine months ended September 30, 1996, to $593,000 during the nine months ended
September 30, 1997. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment fees, (iii) late and other loan fees and (iv)
miscellaneous collections. This increase was primarily attributable to an
increase in income recognized from prepayment fees of $275,000, from $72,000
during the nine months ended September 30, 1996 to $347,000 during the nine
months ended September 30, 1997. Additionally, income recognized from the
monitoring of construction projects in process increased by $43,000, from
$109,000 during the nine months ended September 30, 1996, to $152,000 during
the nine months ended September 30, 1997. This increase was offset by a
decrease in income recognized from assumption, modification and extension fees
of $18,000, from $112,000 during the nine months ended September 30, 1996, to
$94,000 during the nine months ended September 30, 1997.
Expenses, other than interest expense, consist primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to PMC
Commercial's officers (other than stock options) and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses paid by the Company include direct transaction costs incident to
the acquisition and disposition of investments, regular legal and auditing fees
and expenses, the fees and expenses of PMC Commercial's independent trust
managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of the Company's custodian and transfer agent, if
any. The Company, rather than the Investment Manager, is also required to pay
expenses associated with any litigation and other extraordinary or nonrecurring
expenses. The Investment Management Agreement was amended on July 1, 1996,
resulting in investment management fees being reduced from 2.5% to 1.67% of
invested assets and from 1.5% to 0.875% of invested assets in excess of
beneficiaries' equity. Pursuant to the amended Investment Management Agreement,
the Company incurred an aggregate of approximately $1.2 million in management
fees for the nine months ended September 30, 1997. Of the total management fees
paid or payable to the Investment Manager during the nine months ended
September 30, 1997, $130,000 has been offset against commitment fees as a
direct cost of originating loans. Investment management fees were approximately
$1.3 million for the nine months ended September 30, 1996, $251,000 of which
were incurred as a cost of the Offering. Of
11
<PAGE> 14
the total management fees paid or payable to the Investment Manager during the
nine months ended September 30, 1996, $220,000 was offset against commitment
fees as a direct cost of originating loans and the $251,000 described above was
offset against additional paid-in capital. The decrease in investment management
fees of approximately $100,000 (prior to offsetting direct costs related to the
origination of loans), or 8%, is primarily due to the $251,000 of costs incurred
during the nine months ended September 30, 1996 related to the Offering. This
decrease is offset by increased fees resulting from increases in the Company's
invested assets and common equity capital. The average quarterly invested assets
increased by $27.4 million (36%), from $75.4 million during the nine months
ended September 30, 1996, to $102.8 million during the nine months ended
September 30, 1997. The average quarterly common equity capital increased by
$37.3 (73%), from $50.8 million during the nine months ended September 30, 1996,
to $88.1 million during the nine months ended September 30, 1997.
Legal and accounting fees decreased by $1,000 (3%), from $39,000
during the nine months ended September 30, 1996, to $38,000 during the nine
months ended September 30, 1997. This decrease is attributable to the billing
of accounting and corporate legal fees during the nine months ended September
30, 1996.
General and administrative expenses increased by $20,000 (21%), from
$94,000 during the nine months ended September 30, 1996, to $114,000 during the
nine months ended September 30, 1997. This increase is primarily attributable
to an increase in costs related to: (i) printing and shareholder servicing
expenses as a result of the increased number of shareholders of record and (ii)
the Company's revolving credit facility during the nine months ended September
30, 1997.
Interest expense during the nine months ended September 30, 1997
consisted primarily of interest incurred on the Notes issued pursuant to the
Private Placement (approximately $1.2 million) and interest incurred on
borrower advances (approximately $64,000). During the nine months ended
September 30, 1996, interest expense consisted primarily of interest incurred
on the Notes issued pursuant to the Private Placement (approximately $1.1
million), interest incurred on the Company's revolving credit facility
(approximately $138,000), amortization of deferred borrowing costs
(approximately $53,000) and interest incurred on borrower advances
(approximately $24,000).
As the Company is currently qualified as a Real Estate Investment
Trust ("REIT") under the applicable provisions of the Internal Revenue Code of
1986, as amended ("the Code"), there are no provisions in the financial
statements for Federal income taxes.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
The net income of the Company during the three months ended September
30, 1997 and 1996, was $2.6 million and $2.2 million, $0.42 and $0.37 per
share, respectively. The Company's weighted average shares outstanding
increased by 7%, from 5,859,901 during the three months ended September 30,
1996 to 6,275,213 during the three months ended September 30, 1997.
Interest income - loans increased by $900,000 (41%), from $2.2 million
during the three months ended September 30, 1996, to $3.1 million during the
three months ended September 30, 1997. This increase was primarily attributable
to the reallocation of the Company's initial investment of the proceeds from
the Private Placement in March 1996 and the Offering in July 1996
12
<PAGE> 15
from cash and government securities to higher-yielding loans to small
businesses. The average monthly invested assets in loans to small businesses
increased by $31.8 million (43%), from $74.7 million during the three months
ended September 30, 1996, to $106.5 million during the three months ended
September 30, 1997. The annualized average yields on loans for the three months
ended September 30, 1997 and 1996 were approximately 12.2% and 12.4%,
respectively. The decreased yield was primarily due to a reduction in rates
charged on new loans. During the three months ended September 30, 1997,
approximately $3.6 million on 3 loans was paid in full with a corresponding
recognition of approximately $67,000 of deferred fee income. Interest income -
loans includes interest earned on loans, the accretion of a discount on
purchased loans (approximately $8,000 during both of the three month periods
ended September 30, 1997 and 1996) and the accretion of deferred commitment
fees (approximately $154,000 and $76,000 during the three months ended
September 30, 1997 and 1996, respectively).
Interest and dividends - other investments decreased by $421,000
(75%), from $565,000 during the three months ended September 30, 1996, to
$144,000 during the three months ended September 30, 1997. This decrease was
due to a reduction in funds available for short-term investments during the
three months ended September 30, 1997. The proceeds from the Private Placement
in March 1996 and from the Offering in July 1996 were initially invested in
short-term investments and are being used to make loans in accordance with the
Company's underwriting criteria. The average monthly short-term investments of
the Company decreased by $32.6 million (77%), from $42.6 million during the
three months ended September 30, 1996, to $10.0 million during the three months
ended September 30, 1997. The average yields on short-term investments during
the three months ended September 30, 1997 and 1996 were approximately 5.7% and
5.3%, respectively.
Other income decreased by $32,000 (17%), from $187,000 during the
three months ended September 30, 1996, to $155,000 during the three months
ended September 30, 1997. Other income consists of: (i) amortization of
construction monitoring fees, (ii) prepayment penalties, (iii) late and other
loan fees and (iv) miscellaneous collections. The decrease was primarily due to
a decrease in income recognized from assumption, modification and extension
fees of $16,000, from $69,000 during the three months ended September 30, 1996,
to $53,000 during the three months ended September 30, 1997. Additionally,
income recognized from the monitoring of construction projects in process
decreased by $2,000, from $39,000 during the three months ended September 30,
1996, to $37,000 during the three months ended September 30, 1997, and income
recognized from prepayment fees decreased by $7,000, from $72,000 during the
three months ended September 30, 1996, to $65,000 during the three months ended
September 30, 1997.
Expenses, other than interest expense, consist primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to PMC
Commercial's officers (other than stock options) and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses paid by the Company include direct transaction costs incident to
the acquisition and disposition of investments, regular legal and auditing fees
and expenses, the fees and expenses of PMC Commercial's independent trust
managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of the Company's custodian and transfer agent. The
Company, rather than the Investment Manager, is also required to pay expenses
associated with any litigation and other extraordinary or nonrecurring
expenses. Pursuant to the Investment Management Agreement, the Company incurred
an aggregate of $412,000 in management fees for the three months
13
<PAGE> 16
ended September 30, 1997. Of the total management fees paid or payable to the
Investment Manager during the three months ended September 30, 1997, $39,000
has been offset against commitment fees as a direct cost of originating loans.
Investment management fees were $520,000 for the three months ended September
30, 1996, $251,000 of which were incurred as a cost of the Offering. Of the
total management fees paid or payable to the Investment Manager during the
three months ended September 30, 1996, $76,000 was offset against commitment
fees as a direct cost of originating loans and the $251,000 described above was
offset against additional paid-in capital. The decrease in investment
management fees of $108,000 (prior to offsetting direct costs related to the
origination of loans and the issuance of the Company's Common Shares), or 21%,
is primarily due to the $251,000 of costs incurred during the three months
ended September 30, 1996 related to the Offering. This decrease is offset by
increased fees resulting from increases in the Company's invested assets and
common equity capital. The average quarterly invested assets increased by $32.1
million (43%), from $75.4 million during the three months ended September 30,
1996, to $107.5 million during the three months ended September 30, 1997. The
average quarterly common equity capital increased by $38.6 million (76%), from
$50.8 million during the three months ended September 30, 1996, to $89.4
million during the three months ended September 30, 1997.
Legal and accounting fees decreased by $13,000 (79%) during the three
months ended September 30, 1997 as compared to the three months ended September
30, 1996. This decrease is attributable to the billing of accounting and
corporate legal fees during the three months ended September 30, 1996.
General and administrative expenses decreased by $1,000 (3%), from
$38,000 during the three months ended September 30, 1996, to $37,000 during the
three months ended September 30, 1997. This decrease is attributable to reduced
miscellaneous operating expenses incurred during the three months ended
September 30, 1997.
Interest expense during the three months ended September 30, 1997
consisted primarily of interest on the Notes issued pursuant to the Private
Placement (approximately $365,000) and interest incurred on borrower advances
(approximately $21,000). During the three months ended September 30, 1996,
interest expense consisted of interest incurred on the Notes issued pursuant to
the Private Placement (approximately $488,000), the amortization of deferred
borrowing costs (approximately $23,000), and interest incur$5,000).
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of PMC Commercial's funds is to originate loans. PMC
Commercial also uses funds for the: (i) acquisition of loans from governmental
agencies and/or their agents, (ii) payment of dividends to shareholders, (iii)
payment of management and advisory fees (in lieu of salaries and other
administrative overhead), (iv) payment of general corporate overhead and (v)
payment of interest and principal on borrowed funds.
At September 30, 1997, the Company had $3.7 million of cash and cash
equivalents and approximately $33.8 million of loan commitments outstanding to
small business concerns primarily in the lodging industry. The weighted average
interest rate on these future funding commitments at
14
<PAGE> 17
September 30, 1997 was approximately 10.5%. These commitments include
approximately $9.6 million of funding which remains on construction loan
commitments outstanding and approximately $5.9 million of loan commitments
outstanding relating to SBA 504 Program loans. An additional $2.7 million in
commitments made by the Investment Manager had been designated for PMC
Commercial at September 30, 1997, subject to availability of funds. These
commitments are made in the ordinary course of business and, in management's
opinion, are generally on the same terms as those to existing borrowers.
Commitments to extend credit are conditioned upon compliance with the terms of
the commitment letter. Commitments have fixed expiration dates and require
payment of a fee. Since some commitments expire without the proposed loan
closing, the total committed amounts do not necessarily represent future cash
requirements.
In general, to meet its liquidity requirements, including expansion of
its outstanding loan portfolio, PMC Commercial intends to use: (i) its
short-term credit facility as described below, (ii) the placement of long-term
borrowings, (iii) the securitization and sale of a portion of the loan
portfolio, (iv) the issuance of debt securities, and/or (v) the offering of
additional equity securities, including preferred shares of beneficial interest
(the "Preferred Shares"). Pursuant to the Investment Management Agreement, if
the Company does not have available capital to fund outstanding commitments,
the Investment Manager will refer such commitments to affiliates of the Company
with respect to which the Company will receive no fees. The ability of the
Company to meet its liquidity needs will depend on its ability to borrow funds
or issue equity securities on favorable terms.
The Company has a credit facility which provides up to the lesser of
$20 million or an amount equal to 50% of the value of the underlying property
collateralizing the borrowings. At September 30, 1997, the Company had no
outstanding borrowings under the credit facility and $20 million available
thereunder. The Company is charged interest on the balance outstanding under
the credit facility at the Company's election of either the prime rate of the
lender less 50 basis points or 200 basis points over the 30, 60 or 90 day
LIBOR. Additional funds will be available to the Company from the proceeds of
the dividend reinvestment plan and through SBA 504 Program loan takeouts.
Management anticipates these sources of funds will be adequate to meet its
existing obligations.
On March 12, 1996 the Company completed the Private Placement of
approximately $29.5 million of Notes, issued pursuant to a rated structured
financing, which are collateralized by the Partnership's commercial loan
portfolio. Net profit on these leveraged funds is materially dependent on the
spread between the rate at which it borrowed these funds (6.72% on $20.1
million outstanding at September 30, 1997) and the rate obtained on loan of
these funds (at September 30, 1997, the outstanding loans collateralizing this
transaction of $28.8 million have a weighted average coupon of approximately
11.3%). In general, if the returns on loans originated by the Company with
funds obtained from any borrowing or the issuance of any Preferred Shares fail
to cover the cost of such funds, the net cash flow on such loans will be
negative. Additionally, any increase in the interest rate earned by the Company
on investments in excess of the interest rate or dividend rate incurred on the
funds obtained from either borrowings or the issuance of Preferred Shares would
cause its net income to increase more than it would without the leverage.
Conversely, any decrease in the interest rate earned by the Company on
investments would cause net income to decline by a greater amount than it would
if the funds had not been obtained from either borrowings or the issuance of
Preferred Shares. Leverage is thus generally considered a speculative
investment technique.
15
<PAGE> 18
In July 1996, PMC Commercial completed the sale of 2,335,000 Common
Shares pursuant to the Offering. The Offering resulted in net proceeds to the
Company of $34.5 million, of which approximately $547,000 were used to pay
costs in connection with the Offering.
After utilization of the funds available as described above, the
Company will continue to borrow funds based on a variable rate of interest
(short-term borrowings) through its existing credit facility and originate
loans at a fixed rate of interest. The Private Placement and Offering will not
provide the Company with sufficient capital to expand the outstanding portfolio
at historical growth levels. Accordingly, the Company is currently evaluating
additional sources of financing and expects to structure a financing similar to
the Private Placement for proceeds between $30 million to $40 million during
the first quarter of 1998. There can be no assurance the Company will be able
to complete this financing. If this source of funds is not available, the
Company will have to either (i) fully utilize its $20 million revolving credit
facility, (ii) increase its revolving credit facility, (iii) issue senior debt
and/or (iv) issue Common or Preferred Shares. To the extent none of these
financing options are available, the Company will have to slow the rate of
increasing the outstanding loan portfolio.
COMPETITION
PMC Commercial's primary competition comes from banks, financial
institutions and franchise loan programs. Some of these competitors have
greater financial and larger managerial resources than the Company. Competition
has increased as the financial strength of the banking and thrift industries
improved. Management of the Company believes that PMC Commercial competes
effectively with such entities on the basis of the interest rates, maturities
and payment schedules, the quality of its service, its reputation as a lender,
the timely credit analysis and decision making processes, and the renewal
options available to borrowers.
The Company experienced a 33% increase in loans originated, from $27
million during the nine months ended September 30, 1996, to $36 million during
the nine months ended September 30, 1997. However, the Company has experienced
some loan prepayment activity during the same period due, in significant part,
to increased competition. In management's opinion, there has been an increasing
amount of competitor lending activity at advance rates and interest rates which
are considerably more aggressive than those offered by the Company. In order to
maintain a quality portfolio, the Company will continue to adhere to its
historical underwriting criteria. Consequently, certain loan origination
opportunities will not be funded by the Company and prepayment activity may
continue. However, it is the intention of management to cushion the effect that
this competition has on the Company's loan portfolio by reducing the interest
rates offered to a niche group of qualified borrowers that the Company has not
historically served. These lower interest rates will be available for borrowers
whose related properties; (i) have more seasoned demonstrated debt service
coverages and reduced loan-to-value ratios as compared to our present borrowers
and (ii) otherwise meet the underwriting criteria established by the Company.
16
<PAGE> 19
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED ON THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties and, in most instances, are
identified through the use of words such as "anticipates," "expects" and
"should." Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
17
<PAGE> 20
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Forms 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1997.
18
<PAGE> 21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Commercial Trust
Date: 11/12/97 /s/ Lance B. Rosemore
-------------- ---------------------
Lance B. Rosemore
President
Date: 11/12/97 /s/ Barry N. Berlin
-------------- ----------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
19
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10-Q OF PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 34
<SECURITIES> 3,708
<RECEIVABLES> 109,875<F1>
<ALLOWANCES> (50)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,972<F2>
<CURRENT-LIABILITIES> 8,244<F3>
<BONDS> 20,094
0
0
<COMMON> 90,032
<OTHER-SE> (398)
<TOTAL-LIABILITY-AND-EQUITY> 117,972
<SALES> 0
<TOTAL-REVENUES> 10,322
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,295
<INCOME-PRETAX> 7,752
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,752
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
<FN>
<F1>Includes current and long-term portion of all loans receivable - before reserve
and related interest receivable.
<F2>Includes the following items not included above:
(i) Other assets, net 35
(ii) Deferred borrowing costs 379
(iii) Restricted investments 3,991
------
$4,405
======
<F3>Includes the following items not included above:
(i) Dividends payable 2,647
(ii) Other liabilities 187
(iii) Interest payable 113
(iv) Borrower advances 3,924
(v) Unearned commitment fees 909
(vi) Due to affiliates 340
(vii) Unearned construction
monitoring fees 124
------
$8,244
======
</FN>
</TABLE>
