<PAGE> 1
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, 1997
[ ] 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)
349-3200 (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 27, 1998 as reported on the American Stock Exchange, was
approximately $125 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 27, 1998, Registrant had outstanding 6,459,529 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, 1998
are incorporated by reference into Part III.
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PMC COMMERCIAL TRUST
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form
10-K
Report
Item Page
- ---- ----
PART I
<S> <C>
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
7A. Quantitative and Qualitative Disclosures about Market Risk................................ 20
8. Consolidated Financial Statements and Supplementary Data.................................. 21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 21
PART III
10. Directors and Executive Officers of the Registrant........................................ 22
11. Executive Compensation.................................................................... 22
12. Security Ownership of Certain Beneficial Owners and Management............................ 22
13. Certain Relationships and Related Transactions............................................ 22
PART IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................................................ 23
Glossary......................................................................................... 24
Signatures....................................................................................... 25
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"),
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"). In addition
to its lending activities, the Company is pursuing investment opportunities
through the ownership of commercial properties. It is anticipated that many of
these investments will also be in the lodging industry. 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 as well as through property ownership. The Company currently has four
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. Fourth, the Company intends to
selectively invest in commercial real estate. In 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, the Company has primarily been a lender 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, 1997, (i) 95.7% of the Company's
outstanding loan portfolio consisted of loans for the acquisition, renovation
and construction of hotels, and (ii) Holiday Inn, Days Inn and Comfort Inn
franchisees accounted for 22.9%, 14.8% and 12.9%, respectively, of the Company's
outstanding loan portfolio.
The Company operates from the offices of the Investment Manager in
Texas, 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 Company is not responsible for any compensation to PMC Capital for
loan 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
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December 31, 1997, 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
PMC Capital through the SBA Section 7(a) loan program (the "SBA 7(a) Program")
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) Program 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) Program 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
available funds, 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, 1997 and 1996, the Company closed
loans to 33 and 32 borrowers, respectively. Aggregate fundings for the years
ended December 31, 1997 and 1996 were approximately $43.1 million and $40.4
million, respectively, and collected commitment fees of approximately $754,000
and $1.6 million, respectively.
Approximately 27% of the Company's loan portfolio as of December 31,
1997 consisted of loans to borrowers in Texas. No other state had a
concentration of 10% or greater of the loan portfolio at December 31, 1997. At
December 31, 1996, approximately 32% of the Company's loan portfolio consisted
of loans to borrowers in Texas. The Company's loan portfolio was approximately
96% and 97% concentrated in the lodging industry at December 31, 1997 and 1996,
respectively.
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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 $1.5 million and
$1.4 million in net unamortized deferred commitment fees at December 31, 1997
and 1996, respectively.
LOAN PORTFOLIO
From December 28, 1993 (commencement of operations) through December
31, 1997, the Company has funded an aggregate principal amount (including
purchased loans) of approximately $153.4 million related to 147 loans. The
weighted average interest rate for the Company's loans outstanding as of
December 31, 1997 was 10.9%.
All loans are paying as agreed, except for one (see "Delinquency and
Collections"). From inception through December 31, 1997, the Company has not
experienced any 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, 1997, 1996, 1995 and 1994 and in the period from
commencement of operations (December 28, 1993) to December 31, 1993 were 10.68%,
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, 1996 and 1997.
<TABLE>
<CAPTION>
INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED (2)
(IN THOUSANDS)
INTEREST RATES
-----------------------------------------------------------------------------
PERIOD ORIGINATED 9.90-10.49% 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
Year ended December 31,
1997 10,052 30,481 980 1,616 -- 43,129
-------- -------- -------- -------- -------- --------
Total $ 14,030 $ 80,326 $ 18,307 $ 39,129 $ 352 $152,144
======== ======== ======== ======== ======== ========
Percentage of Portfolio 9.2% 52.8% 12.0% 25.7% 0.2% 100.0%
======== ======== ======== ======== ======== ========
</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, 1997 to borrowers involved in the lodging (national
franchises and independent hotels) and commercial real estate industries:
<TABLE>
<CAPTION>
Principal Percentage
No. of Outstanding of
Properties (In thousands) Portfolio
----- ------------ ---------
<S> <C> <C> <C>
Holiday Inn .................... 25 $ 25,400 22.9%
Days Inn ....................... 14 16,376 14.8%
Comfort Inn .................... 10 14,242 12.9%
Quality Inn .................... 4 6,760 6.1%
Best Western ................... 7 4,743 4.3%
Econolodge ..................... 4 4,075 3.7%
Hampton Inn .................... 5 3,588 3.2%
Ramada Inn ..................... 3 3,418 3.1%
Wingate Inn .................... 2 2,989 2.7%
Home and Hearth ................ 2 2,853 2.6%
Travelodge ..................... 3 2,770 2.5%
Howard Johnson ................. 3 2,633 2.4%
Sheraton ....................... 1 2,475 2.2%
Super 8 ........................ 3 2,443 2.2%
Sleep Inn ...................... 2 1,954 1.8%
Wellesley Inn .................. 2 1,408 1.3%
Microtel ....................... 2 1,279 1.2%
Shoney's Inn ................... 1 1,240 1.1%
Clarion ........................ 1 1,128 1.0%
-------- -------- -------
Total of Franchise Affiliates .. 94 101,774 92.0%
Independent Hotels ............. 7 4,173 3.7%
Commercial Real Estate ......... 4 4,795 4.3%
-------- -------- -------
Total .......................... 105 $110,742 100.0%
======== ======== =======
</TABLE>
LOANS ORIGINATED OR PURCHASED BY QUARTER (1)
<TABLE>
<CAPTION>
1997 1996 1995 1994
--------- --------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
First Quarter................... $13,955 $ 4,830 $ 9,328 $ 7,039
Second Quarter.................. 12,795 8,801 11,110 13,594
Third Quarter................... 9,128 12,955 4,441 6,471
Fourth Quarter.................. 7,251 13,844 6,832 7,879
------- ------- ------- -------
$43,129 $40,430 $31,711 $34,983
======= ======= ======= =======
</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.
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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
DECEMBER 28, 1993
(COMMENCEMENT
YEARS ENDED OF OPERATIONS)
DECEMBER 31, TO
---------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
-------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans receivable - beginning of period .... $ 91,981 $ 59,129 $ 32,694 $ 3,119 $ --
Loans originated or purchased ............. 43,129 40,430 31,711 34,983 3,216
Loan repayments (1) ....................... (25,843) (7,181) (4,992) (4,862) --
Other adjustments (2) ..................... (135) (397) (284) (546) (97)
--------- --------- --------- --------- ---------
Loans receivable - end of period .......... $ 109,132 $ 91,981 $ 59,129 $ 32,694 $ 3,119
========= ========= ========= ========= =========
</TABLE>
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(1) Includes the payoff on certain SBA 504 program loans (see "SBA Section 504
Program") and prepaid loans.
(2) 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, 1997, the Company increased its loan
portfolio under management through the continued utilization of proceeds from
the issuance of the Notes, a public offering of common shares of beneficial
interest ("Common Shares") completed in July 1996 and proceeds from borrowings
under the Company's credit facility.
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
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. At December 31,
1997, the Company had utilized all proceeds from the Private Placement.
On July 2, 1996, the Company completed the sale of two 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 were 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.
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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, and the Company's investment policies may be
modified or amended by the Company's Board of Trust Managers at any time without
shareholder approval.
LOAN PORTFOLIO CHARACTERISTICS
As a result of the application of the Company's underwriting criteria,
at December 31, 1997 the Company's loan portfolio had 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 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.
Set forth below is certain information regarding the Company's
portfolio as of December 31, 1997:
a. The Company had 117 loans outstanding with an aggregate principal
amount outstanding of approximately $110.8 million.
b. All loans were paying as agreed except for one loan with a
principal balance outstanding at December 31, 1997 of
approximately $784,000. No other loans were more than 30 days
delinquent.
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c. Borrowers are principally involved in the lodging industry
(95.7%). The remainder of the loan portfolio is comprised of four
loans in the commercial office rental market.
d. The Company has not loaned more than 10% of its assets to any
single borrower.
e. All originated loans provide for interest payments at fixed
rates.
f. 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.
g. 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.
h. The weighted average remaining maturity for the Company's
portfolio of loans not including amounts outstanding to be paid
off pursuant to the SBA 504 program was approximately 8 years.
DELINQUENCY AND COLLECTIONS
As of December 31, 1997 the Company had one delinquent loan with a
principal balance of approximately $784,000. The loan is collateralized by a 117
room hotel property operating in Michigan and was originated in conjunction with
the SBA 504 Program. In the opinion of management, the loan is not deemed to be
impaired other than the potential for unrecovered costs of foreclosure, if
required.
Generally, 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 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 as considered necessary.
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
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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, 1997, the Company had approximately $3.5
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 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, 1997, the Company was in the process of monitoring construction
projects with approximately $24.2 million in total commitments, of which $15.6
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, 1997,
approximately $1.4 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.
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.
8
<PAGE> 11
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 equal to (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 due to PMC Advisers 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.
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, $1.6 million
and $1.2 million in management fees for the years ended December 31, 1997, 1996
and 1995, respectively, $251,000 of which has been offset against additional
paid-in capital during 1996 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, 1997, 1996 and 1995, $172,500, $318,500 and $244,000,
respectively, have been offset against commitment fees as direct costs of
originating loans.
COMPETITION
The Company's primary competition comes from banks, financial
institutions and other lending companies. Additionally, there are lending
programs which have been established by national franchisors in the lodging
industry. 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. In management's opinion, there
has been an increasing amount of competitive 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, and as a result, certain loan
origination opportunities will not be funded by the Company. The Company
believes that it competes effectively with such entities on the basis of the
lending programs offered, 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.
9
<PAGE> 12
PREPAYMENT CONSIDERATIONS
The terms of the loans originated by the Company provide that, subject to
certain exceptions and other qualifications, voluntary prepayments of principal
of the loans (each, a "Principal Prepayment") are permitted but are required to
be accompanied by a specified charge (a "Prepayment Charge") or by a yield
maintenance premium (a "Yield Maintenance Premium"), during all of their
respective terms to maturity. The Prepayment Charge for each loan as to which
Principal Prepayments are required to be accompanied by a Prepayment Charge, at
any time of determination, will be equal to the product of the amount of the
related Principal Prepayment and the percentage applicable to Principal
Prepayments on such Loan at such time of determination.
Prepayment Charges are either (a) 2% to 5% of the amount of principal
being prepaid or (b) 90 days of interest at the stated interest rate applied to
the amount of principal being prepaid. Some of the Loans with Prepayment Charges
are permitted to prepay principal up to 10% per year of the original loan
balance without penalty.
As a result of the general downward trend in interest rates, the Company
has experienced an increased rate in the prepayment of its loans. During the
year ended December 31, 1997, the Company received $18.3 million in principal
prepayments as compared to $2.2 million during the year ended December 31, 1996.
On such prepayments, the Company received the immediate benefit of the
prepayment charge, however, the proceeds from the prepayments were invested
initially in temporary investments and have been reloaned or committed to be
reloaned at lower rates. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations". The impact of the lower lending rates is
partially offset (based on current market conditions) by the reduced cost of the
Company's borrowings. See"Interest Rate and Prepayment Risk".
INTEREST RATE AND PREPAYMENT RISK
The ability of the Company to achieve certain of its investment
objectives will depend in part on its ability to continue to borrow funds or
issue preferred shares of beneficial interest on favorable terms, and there can
be no assurance that such borrowings or issuances can in fact be achieved. The
Company's net income is materially dependent upon the "spread" between the rate
at which it borrows funds (typically either short-term at variable rates or
long-term at fixed rates) and the rate at which it loans these funds (typically
long-term at fixed rates). During periods of changing interest rates, interest
rate mismatches could negatively impact the Company's net income and dividend
yield and, as a result the market price of the Common Shares. If interest rates
decline, the Company may experience significant prepayments, and such
prepayments, as well as scheduled repayments, are likely to be reloaned at lower
rates, which may have an adverse effect on the Company's business, financial
condition and results of operations and on its ability to maintain distributions
at the level then existing. The loans originated by the Company have prepayment
fees charged as described above which the Company believes helps mitigate the
likelihood and effect of Principal Prepayments (see "Prepayment
Considerations").
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, 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, 1997.
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, 1998, there
were approximately 750 holders of record of Common Shares and the last reported
sales price of the Common Shares was $19.88. 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, 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
March 31, 1997.........................$18.38 $17.00 $0.400 --
June 30, 1997..........................$19.25 $16.63 $0.410 --
September 30, 1997.....................$20.63 $18.00 $0.420 --
December 31, 1997......................$20.75 $18.75 $0.430 --
</TABLE>
12
<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 four years in the period ended December 31, 1997
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
in 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 in this Form 10-K.
<TABLE>
<CAPTION>
Period From
June 4, 1993
Years Ended December 31, (date of inception)
----------------------------------------------------- to December 31,
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
(in thousands, except share and per share information)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans............ $ 12,378 $ 8,528 $ 5,610 $ 2,289 $ 3
Interest and dividends - other
investments................... $ 643 $ 1,235 $ 325 $ 1,222 $ 13
Other income..................... $ 792 $ 385 $ 295 $ 180 $ --
Total revenues .................... $ 13,813 $ 10,148 $ 6,230 $ 3,691 $ 16
Expenses:
Interest ........................ $ 1,726 $ 1,805 $ 222 $ 37 $ --
Advisory and servicing fees, net $ 1,449 $ 992 $ 945 $ 357 $ -- (3)
Other............................ $ 249 $ 174 $ 167 $ 97 $ 1
Total expenses................... $ 3,424 $ 2,971 $ 1,334 $ 491 $ 1
Net income......................... $ 10,389 $ 7,177 $ 4,896 $ 3,200 $ 15
Weighted average common shares
outstanding...................... 6,242,182 4,755,289 3,451,091 3,430,009 3,099,530
Net income per common share........ $ 1.66 $ 1.51 $ 1.42 $ 0.93 $ 0.01
Dividends per common share......... $ 1.65 $ 1.55 $ 1.38 $ 1.02 $ -- (3)
Return on average assets (1)....... 8.6% 7.6% 8.8% 6.5% $ -- (3)
Return on average common beneficiaries'
equity (2)....................... 11.9% 11.3% 10.2% 6.9% $ -- (3)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net............... $ 109,132 $ 91,981 $ 59,129 $ 32,694 $ 3,119
Total assets........................ $ 115,877 $ 121,749 $ 59,797 $ 51,785 $ 43,153
Notes payable ...................... $ 18,721 $ 26,648 $ 7,920 $ -- $ --
Beneficiaries' equity............... $ 91,240 $ 85,829 $ 48,183 $ 47,440 $ 42,941
Total liabilities and beneficiaries'
equity ............................ $ 115,877 $ 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.
13
<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, 1997, 1996 and 1995, the Company originated
and funded $43.1 million, $40.4 million and $31.7 million of loans. All of the
above loan originations were to corporations and individuals in the lodging
industry except for approximately $1.8 million and $800,000 during the years
ended December 31, 1997 and 1996, respectively.
As of December 31, 1997, the total portfolio outstanding was $110.8
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 10.9%. 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. The annualized average yields on loans,
including all loan fees earned, for the years ended December 31, 1997, 1996 and
1995 were approximately 12.4%, 12.1% and 12.1%, respectively. 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, 1997 are $3.5 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, a
$60,000 loan loss reserve has 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 a 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, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996
The net income of the Company during the years ended December 31, 1997
and 1996, was $10.4 million and $7.2 million, $1.66 and $1.51 per share,
respectively. The Company's earnings per share during the years ended December
31, 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 31%, from 4,755,289
during the year ended December 31, 1996 to 6,242,182 during the year ended
December 31, 1997.
14
<PAGE> 17
Interest income - loans increased by $3.9 million (46%), from $8.5
million during the year ended December 31, 1996, to $12.4 million during the
year ended December 31, 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 $32.5 million
(45%), from $72.5 million during the year ended December 31, 1996, to $105.0
million during the year ended December 31, 1997. The yield was increased during
the year ended December 31, 1997 as 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 year ended December 31,
1997, approximately $18.3 million on 18 loans was prepaid in full with a
corresponding recognition of approximately $479,000 of deferred fee income.
Interest income - loans includes interest earned on loans, the accretion of a
discount on purchased loans (approximately $33,000 and $30,000 during the years
ended December 31, 1997 and 1996, respectively) and the accretion of deferred
commitment fees (approximately $674,000 and $283,000 during the years ended
December 31, 1997 and 1996, respectively).
Interest and dividends - other investments decreased by $592,000 (48%),
from $1,235,000 during the year ended December 31, 1996, to $643,000 during the
year ended December 31, 1997. This decrease was due to a reduction in funds
available for short-term investments during the year ended December 31, 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 then used to
make loans in accordance with the Company's underwriting criteria. The average
monthly short-term investments of the Company decreased by $9.5 million (44%),
from $21.7 million during the year ended December 31, 1996, to $12.2 million
during the year ended December 31, 1997. The average yields on short-term
investments during the years ended December 31, 1997 and 1996 were approximately
5.3% and 5.7%, respectively.
Other income increased by $407,000 (106%), from $385,000 during the
year ended December 31, 1996, to $792,000 during the year ended December 31,
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 $383,000, from $87,000
during the year ended December 31, 1996 to $470,000 during the year ended
December 31, 1997. Additionally, income recognized from the monitoring of
construction projects in process increased by $59,000, from $140,000 during the
year ended December 31, 1996, to $199,000 during the year ended December 31,
1997. This increase was offset by a decrease in income recognized from
assumption, modification and extension fees of $65,000 , from $119,000 during
the year ended December 31, 1996, to $54,000 during the year ended December 31,
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 $1.6 million in management
fees for the year ended December 31, 1997. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1997,
$172,500 has been offset against commitment fees as a direct cost of originating
loans. Investment management fees were approximately $1.6 million for the year
ended December 31, 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 year ended December 31, 1996, $318,500 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 average quarterly invested assets
increased by $31.6 million
15
<PAGE> 18
(44%), from $72.5 million during the year ended December 31, 1996, to $104.1
million during the year ended December 31, 1997.
Legal and accounting fees decreased by $2,000 (3%), from $57,000 during
the year ended December 31, 1996, to $55,000 during the year ended December 31,
1997.
General and administrative expenses increased by $17,000 (15%), from
$117,000 during the year ended December 31, 1996, to $134,000 during the year
ended December 31, 1997. This increase is primarily attributable to an increase
in costs related to printing and shareholder servicing expenses as a result of
the increased number of shareholders of record.
Interest expense during the year ended December 31, 1997 consisted of
interest incurred on the Notes issued pursuant to the Private Placement
(approximately $1.5 million), amortization of deferred borrowing costs
(approximately $95,000) and interest incurred on borrower advances
(approximately $83,000). During the year ended December 31, 1996, interest
expense consisted of interest incurred on the Notes issued pursuant to the
Private Placement (approximately $1.6 million), interest incurred on the
Company's revolving credit facility (approximately $138,000), amortization of
deferred borrowing costs (approximately $75,000) and interest incurred on
borrower advances (approximately $51,000). The decrease in interest expense from
$1.8 million during the year ended December 31, 1996 to $1.7 million during the
year ended December 31, 1997 was primarily attributable to the decrease in
principal outstanding on the Notes issued pursuant to the private placement.
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.
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 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. 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
16
<PAGE> 19
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).
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.
17
<PAGE> 20
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.
CASH FLOW ANALYSIS
The Company generated $7.0 million and $12.1 million from operating
activities during the years ended December 31, 1997 and 1996, respectively. The
decrease of $5.1 million (42%) was primarily due to fluctuations in borrower
advances which decreased by $6.8 million from a source of $3.8 million in 1996,
to a use of $3.0 million in 1997, construction monitoring fees which decreased
by $248,000 from a source of $244,000 in 1996, to a use of $4,000 in 1997, and
commitment fees which decreased by $701,000 from a source of $1,270,000 in 1996,
to a source of $569,000 in 1997. 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 collected. During 1997, these projects were in process with
significant outlays of cash necessary to complete. Offsetting the decrease
outlined above was net income which increased by $3.2 million (44%) from $7.2
million during the year ended December 31, 1996, to $10.4 million during the
year ended December 31, 1997.
The Company used $20.3 million and $36.0 million through investing
activities during the years ended December 31, 1997 and 1996, respectively. The
decreased use of funds of $15.7 million was primarily due to an increase of
$18.7 million in principal collected on loans during 1997 compared to the year
ended December 31, 1996. Loans funded were $43.1 million during the year ended
December 31, 1997, as compared to $40.4 million for the year ended December 31,
1996.
During the year ended December 31, 1997, the Company used $12.7 million
from financing activities while during the year ended December 31, 1996 the
Company generated $49.7 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. There were no comparable transactions during the
year ended December 31, 1997. 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 $6.3 million during the year ended
December 31, 1996, to $9.7 million during the year ended December 31, 1997. This
increase of $3.4 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, 1997, the Company had approximately $31.4 million of
total loan commitments outstanding to 27 small business concerns predominantly
in the lodging industry. The weighted average interest rate on these loan
commitments at December 31, 1997 was 10.40%. Of those commitments, approximately
$8.6 million related to 15
18
<PAGE> 21
partially funded construction loans. Approximately $3.5 million of funding
commitments remained on six SBA 504 Program loans. 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. 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). The Company has a dividend reinvestment and cash purchase plan ("DRP")
available to its shareholders (see Note 9 to the accompanying financial
statements). During March, 1998 the Company temporarily suspended the optional
cash purchase portion of the DRP since the use of leverage is currently more
cost effective than the issuance of additional equity. Revisions are currently
in process which amend the calculation of the purchase price of the shares
issued related to open market purchases under the plan.
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.
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, 1997,
the Company had $300,000 outstanding borrowings under the credit facility and
$19.7 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, proceeds from an
additional structured sale or securitization of loans and proceeds from loan
prepayments will be adequate to meet its existing obligations. It is anticipated
that during 1998, 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.
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 11.3%). 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. At December 31, 1997, the Company had
utilized all proceeds from the Private Placement and the Offering.
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
19
<PAGE> 22
by the Company on investments would cause net income to decline by a greater
amount than it would if the funds had not been obtained from either borrowings
or the issuance of Preferred Shares. Leverage is thus generally considered a
speculative investment technique. See "Business -- Prepayment Consideration"
and " -- Interest Rate and Prepayment Risks".
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 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 including the risks associated
with the changing interest rate environment described under the captions
"Business - Prepayment Conditions" and " - - Interest Rate and Prepayment Rate".
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions (including,
without limitation, changes in the interest rates at which the Company can
originate loans and borrow funds and the likelihood that the borrowers will
repay existing obligations) 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
Reporting Comprehensive Income (SFAS 130)
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of comprehensive
income and its components.
Disclosures about Segments of an Enterprise and Related Information (SFAS 131)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for the way that public companies report information about segments in
annual and interim financial statements.
YEAR 2000 COMPLIANCE
The Company is in the final stages of identifying those computer
applications where program changes will be required in order for the
applications to process information accurately subsequent to 1999. Since the
Company currently uses an outside service bureau for a majority of its payroll
data processing, the Company is dependent on the service bureau to be Year 2000
compliant. The service bureau has not yet informed the Company that it is or
will be Year 2000 compliant. The Company also uses purchased software programs
for a variety of functions, such as for check processing and information
resource. The majority of the companies providing these software programs are
Year 2000 compliant. The Company uses proprietary software for its collection
processing and is in the process of identifying the costs required to update
such programs. The cost is not expected to be material. In the event that the
Company or any of the Company's significant vendors do not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
20
<PAGE> 23
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.
21
<PAGE> 24
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, 1998.
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, 1998.
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, 1998.
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, 1998.
22
<PAGE> 25
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
23
<PAGE> 26
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 any
of All Assets 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 any
of All Assets 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 or
All Invested Assets 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 Asses 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.
24
<PAGE> 27
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 25, 1998
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 25, 1998
- -------------------------- Managers, Chief Operating
Dr. Andrew S. Rosemore Officer and Trust Manager
/s/ LANCE B. ROSEMORE President, Chief Executive March 25, 1998
- -------------------------- Officer, Secretary and Trust
Lance B. Rosemore Manager (principal executive
officer)
/s/ BARRY N. BERLIN Chief Financial Officer (principal March 25, 1998
- -------------------------- financial and accounting
Barry N. Berlin officer)
/s/ IRVING MUNN Trust Manager March 25, 1998
- --------------------------
Irving Munn
/s/ ROY H. GREENBERG Trust Manager March 25, 1998
- --------------------------
Roy H. Greenberg
/s/ NATHAN COHEN Trust Manager March 25, 1998
- --------------------------
Nathan Cohen
/s/DR. IRA SILVER Trust Manager March 25, 1998
- --------------------------
Dr. Ira Silver
/s/ DR. MARTHA GREENBERG Trust Manager March 25, 1998
- --------------------------
Dr. Martha Greenberg
</TABLE>
25
<PAGE> 28
PMC COMMERCIAL TRUST
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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
F-1
<PAGE> 29
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, 1997 and 1996, and the related
consolidated statements of income, beneficiaries' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, the
consolidated results of their operations and their cash flows for the each of
the years in the three year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 19, 1998
F-2
<PAGE> 30
PMC COMMERICIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Investments:
Loans receivable, net......................... $ 109,132 $ 91,981
Cash equivalents.............................. 32 25,952
Restricted investments........................ 5,766 2,759
---------- ----------
Total investments.............................. 114,930 120,692
---------- ----------
Other assets:
Cash.......................................... 4 32
Interest receivable........................... 654 615
Deferred borrowing costs, net................. 280 376
Other assets, net............................. 9 34
---------- ----------
Total other assets............................. 947 1,057
---------- ----------
Total assets................................... $ 115,877 $ 121,749
========== ==========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable................................. $ 18,721 $ 26,648
Borrower advances............................. 1,431 4,402
Dividends payable............................. 2,749 2,495
Unearned commitment fees...................... 948 1,160
Due to affiliates............................. 344 625
Unearned construction monitoring fees......... 67 185
Interest payable.............................. 182 239
Other liabilities............................. 193 166
---------- ----------
Total liabilities.............................. 24,635 35,920
---------- ----------
Commitments and contingencies (Note 11)
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,392,518 and
6,085,495 shares issued and outstanding at December 31,
1997 and 1996, respectively................. 64 61
Additional paid-in capital.................... 91,687 86,249
Cumulative net income......................... 25,677 15,288
Cumulative dividends.......................... (26,186) (15,769)
---------- ----------
Total beneficiaries' equity.................... 91,242 85,829
---------- ----------
Total liabilities and beneficiaries' equity.... $ 115,877 $ 121,749
========== ==========
Net asset value per share...................... $ 14.27 $ 14.10
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 31
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Interest income - loans......................................$ 12,378 $ 8,528 $ 5,610
Interest and dividends - other investments................... 643 1,235 325
Other income................................................. 792 385 295
---------- ---------- ----------
Total revenues................................................. 13,813 10,148 6,230
---------- ---------- ----------
Expenses:
Interest..................................................... 1,726 1,805 222
Advisory and servicing fees to affiliate, net................ 1,449 992 945
General and administrative................................... 134 117 96
Provision for loan losses.................................... 60 - -
Legal and accounting fees.................................... 55 57 71
---------- ---------- ----------
Total expenses................................................. 3,424 2,971 1,334
---------- ---------- ----------
Net income.....................................................$ 10,389 $ 7,177 $ 4,896
========== ========== ==========
Weighted average shares outstanding............................ 6,242,182 4,755,289 3,451,091
========== ========== ==========
Basic and diluted earnings per share...........................$ 1.66 $ 1.51 $ 1.42
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 32
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
(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> <C>
Balances, January 1, 1995...................... 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
Shares issued through exercise of
stock options............................. 17,460 - 237 - - 237
Shares issued through dividend
reinvestment and cash
purchase plan............................. 289,563 3 5,217 - - 5,220
Issuance costs................................. - - (16) - (16)
Dividends ( $1.65 per share ).................. - - - - (10,417) (10,417)
Net income..................................... - - - 10,389 - 10,389
--------- -------- --------- -------- --------- ---------
Balances, December 31, 1997.................... 6,392,518 $ 64 $ 91,687 $ 25,677 $ (26,186) $ 91,242
========= ========= ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 33
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
--------------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................$ 10,389 $ 7,177 $ 4,896
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount and fees........................... (820) (453) (369)
Amortization of organization and borrowing costs......... 103 83 8
Provision for loan losses................................ 60 - -
Commitment fees collected, net........................... 569 1,270 546
Construction monitoring fees collected, net.............. (4) 244 8
Changes in operating assets and liabilities:
Accrued interest receivable.......................... (39) (205) (201)
Other assets......................................... 18 7 (26)
Interest payable..................................... (57) 183 56
Borrower advances.................................... (2,971) 3,823 (1,767)
Due to affiliates.................................... (281) (220) 660
Other liabilities.................................... 27 152 14
------------ --------- ---------
Net cash provided by operating activities...................... 6,994 12,061 3,825
------------ --------- ---------
Cash flows from investing activities:
Loans funded................................................. (43,129) (40,430) (31,711)
Principal collected.......................................... 25,843 7,181 4,992
Investment in restricted investments, net.................... (3,007) (2,759) -
------------ --------- ---------
Net cash used in investing activities.......................... (20,293) (36,008) (26,719)
------------ --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares..................... 5,038 38,286 582
Proceeds from issuance of notes payable..................... - 39,040 9,130
Payment of dividends........................................ (9,744) (6,294) (4,250)
Payment of principal on notes payable....................... (7,927) (20,312) (1,210)
Payment of borrowing costs.................................. - (450) -
Payment of issuance costs................................... (16) (547) -
------------ --------- ---------
Net cash provided by (used in) financing activities............ (12,649) 49,723 4,252
------------ --------- ---------
Net increase (decrease) in cash and cash equivalents........... (25,948) 25,776 (18,642)
Cash and cash equivalents, beginning of period................. 25,984 208 18,850
------------ --------- ---------
Cash and cash equivalents, end of period.......................$ 36 $ 25,984 $ 208
=========== ========= =========
Supplemental disclosures:
Dividends reinvested........................................$ 419 $ 210 $ 40
=========== ========= =========
Dividends declared, not paid................................$ 2,749 $ 2,495 $ 1,519
=========== ========= =========
Interest paid...............................................$ 1,687 $ 1,617 $ 165
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 34
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Commercial Trust ("PMC Commercial") was organized in 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:
During the year ended December 31, 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. 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 using an
effective yield method.
F-7
<PAGE> 35
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:
During the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS
No. 128"). Under SFAS No. 128, basic earnings per share is based on the weighted
average number of common shares of beneficial interest outstanding during the
period. Diluted earnings per share considers the effect of dilutive stock
options. Previously reported earnings per share for the years ended December 31,
1996 and 1995 have been conformed to the current years presentation. See Note 7.
RECENT ACCOUNTING PRONOUNCEMENTS:
Reporting Comprehensive Income
In June 1997, The Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for the way that public companies report
information about segments in annual and interim financial statements.
Presently, the Company only operates in one segment of business.
RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to
current year presentation.
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.
F-8
<PAGE> 36
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE: (CONTINUED)
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, 1997, 1996 and 1995, the Company
closed loans to 33, 32 and 31 corporations, partnerships or individuals for
approximately $43.1 million, $40.4 million and $31.7 million and collected
commitment fees of approximately $754,000, $1.6 million and $546,000,
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
using the interest method. During the years ended December 31, 1997, 1996 and
1995, approximately $33,000, $30,000 and $26,000, respectively, of the discount
has been recognized as interest income.
At December 31, 1997, approximately 27% 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, 1997. 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. The
Company's loan portfolio was approximately 96% and 97% concentrated in the
lodging industry at December 31, 1997 and 1996, 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 $1.5 million and $1.4 million in deferred
commitment fees at December 31, 1997 and 1996, respectively.
NOTE 3. CASH EQUIVALENTS:
At December 31, 1997, cash equivalents were $32,000. At December 31,
1996 cash equivalents of approximately $26.0 million were comprised of $19.0
million in money market funds and savings deposits and $7.0 million in
government securities. The Company's investments in government securities all
had maturities within 90 days.
NOTE 4. RESTRICTED INVESTMENTS:
Restricted investments maintained pursuant to a structured financing
completed in March 1996 (see Note 12) include a collection account which remits
balances to the noteholders and reserve account balances held as collateral on
behalf of the noteholders. The collection and reserve accounts consisted of cash
and liquid money market funds of approximately $3.7 million and $1.9 million,
respectively, at December 31, 1997.
Additionally, the Company maintains funds ($101,000 at December 31, 1997)
pursuant to a marketing agreement (the "Agreement") which requires funds equal
to the greater of 2% of all loan commitments made under the Agreement or
F-9
<PAGE> 37
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRICTED INVESTMENTS: (CONTINUED)
$100,000 to be held by the Company (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 such loans. To the extent that the Reserve
Account balance exceeds the amount required, such excess amount will be
reimbursed by the Company on a quarterly basis.
NOTE 5. DUE TO AFFILIATES:
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.
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 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, $1.6 million and $1.2 million in
management fees during the years ended December 31, 1997, 1996 and 1995,
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, 1997, 1996
and 1995, $172,500, $318,500 and $244,000, respectively, has been offset against
commitment fees as a direct cost of originating loans (see Note 2).
F-10
<PAGE> 38
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DUE TO AFFILIATES: (CONTINUED)
Management fees of $1.6 million during the year ended December 31, 1997
were calculated based upon average invested assets of $104.1 million and average
beneficiaries' equity of $88.8 million.
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 for such period.
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 for
such period.
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 for
such period.
NOTE 6. BORROWER ADVANCES AND CONSTRUCTION LENDING:
The Company finances projects during the construction phase. At December
31, 1997 and 1996, the Company was in the process of funding approximately $24.2
million and $28.6 million in construction projects, respectively, of which $8.6
million and $16.5 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,
1997 and 1996, the Company had approximately $1.4 million and $4.5 million,
respectively, in funds held on behalf of borrowers, which is included as a
liability in the accompanying consolidated balance sheets.
NOTE 7. NET INCOME PER SHARE:
The weighted average number of common shares of beneficial interest
outstanding were 6,242,182, 4,755,289 and 3,451,091 for the periods ended
December 31, 1997, 1996 and 1995, respectively. For purposes of calculating
diluted earnings per share, the weighted average shares outstanding were
increased by 9,943; 8,488 and 6,297 for the effect of stock options during the
years ended December 31, 1997, 1996 and 1995, respectively (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.
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.
F-11
<PAGE> 39
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is 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, 1997, 1996 and 1995, 289,563, 236,439 and 34,190 shares, respectively, were
issued pursuant to the plan.
NOTE 10. SHARE OPTION PLANS:
The Company has two stock-based compensation plans, which are described
below. The Company applies Accounting Principles Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for its stock-based compensation
plans. In 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") was issued which, if fully adopted by the Company, would change the
methods the Company applies in recognizing the cost of its stock- based
compensation plans. Adoption of the cost recognition provisions of SFAS No. 123
is optional and the Company has decided not to elect these provisions of SFAS
No. 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and
are presented below.
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 383,551 shares at
December 31, 1997) 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 1997, 1996 and 1995 the
Company granted both qualified and nonqualified stock options under the Stock
Option Plans.
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. In 1997 the
plan was amended so that the non-employee Trust Managers receive options to
purchase 1,000 shares on June 1 of each year. 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
under the Trust Managers Plan at December 31, 1997 and 1996 were 19,000 and
11,000, respectively.
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 1997, 1996 and 1995 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 1997 fully vest in January 1999 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 57,250, 40,350
and 24,880 options during the years ended December 31, 1997, 1996 and 1995,
respectively. As of December 31, 1997, 168,570 share options had been granted
since the inception of the plan. In accordance with APB No. 25, the Company has
not recognized compensation expense for the stock options granted in 1997, 1996
and 1995.
F-12
<PAGE> 40
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHARE OPTION PLANS: (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995 and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ------------------------ -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1.. 78,529 $15.83 72,315 $13.43 71,540 $12.12
Granted......................... 57,250 $19.41 40,350 $16.79 24,880 $15.68
Exercised...................... (23,358) $15.19 (27,846) $11.88 (12,996) $11.88
Forfeited and expired.......... (2,500) $16.68 ( 6,290) $11.88 (11,109) $11.88
------- -------- --------
Outstanding December 31. 109,921 $17.81 78,529 $15.83 72,315 $13.43
======= ======== ========
Exercisable at December 31 40,821 $15.84 21,239 $14.08 15,665 $13.01
======= ======== ========
Weighted-average fair value of
options granted during the year $ 1.09 $ 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 1997, 1996 and 1995: dividend yield
of 9%; expected volatility of 15.78% for 1997 and 16.26% for 1996 and 1995,
respectively; risk-free interest rates of 5.78%, 5.93% and 5.52%, respectively;
and the expected lives of options are assumed to be 3 years, 3.35 years and 5
years, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -------------------------------
NUMBER WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACT LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ---------------- ----------- ------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$11.75 to $15.00 10,821 1.51 $13.72 10,821 $13.72
$15.75 to $19.81 99,100 4.43 $18.26 10,900 $16.14
- ---------------- -------- ------
$11.75 to $19.81 109,921 4.14 $17.81 21,721 $14.94
======== ======
</TABLE>
The pro forma effects on net income and earnings per share for 1997,
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, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------ -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
SFAS No. 123 Charge $ - $ 43 $ - $ 20 $ - $ 1
APB No. 25 Charge $ - $ - $ - $ - $ - $ -
Net Income $ 10,389 $ 10,346 $ 7,177 $ 7,157 $ 4,896 $ 4,895
Basic and Diluted Earnings
Per Share $ 1.66 $ 1.66 $ 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> 41
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $20.1 million of loan commitments outstanding to 18 corporations,
partnership or individuals predominantly in the lodging industry at December 31,
1997. The weighted average contractual interest rate on these loan commitments
at December 31, 1997 was 10.24%. In addition, the Company had approximately $7.5
million of loan commitments outstanding on 15 partially funded construction
loans and approximately $3.5 million of loan commitments outstanding on 6 SBA
504 Program loans at December 31, 1997. 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. 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, 1997, the Company had $300,000
in debt outstanding under the credit facility with availability of $19.7
million. At December 31, 1996, the Company had no debt outstanding under the
credit facility with availability of an additional $20.0 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,
1997, the weighted average interest rate on short-term borrowings under the
revolving credit facility was 8.0%.
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 $25.4 million remained
outstanding at December 31, 1997). 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 $18.4 and
$26.6 million remained outstanding under the Notes at December 31, 1997 and
1996, respectively.
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.
F-14
<PAGE> 42
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by SFAS No. 107 differ from the
carrying amounts of the financial assets and liabilities 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>
1997 1996
------------------------------------ -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Loans receivable, net $109,132 $111,548 $91,981 $94,152
Cash and cash equivalents 36 36 25,984 25,984
Restricted investments 5,766 5,766 2,759 2,759
LIABILITIES:
Notes payable 18,721 18,856 26,648 26,390
</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.
Cash and cash equivalents: The carrying amount is a reasonable
estimation of fair value.
Restricted Investments: 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>
<CAPTION>
1997
- --------------------------------------------------------------------------------
(In Thousands, except earnings per share)
Earnings Per
Revenues Net Income Share
---------- ---------- ------------
<S> <C> <C> <C>
First Quarter......... $ 3,165 $ 2,324 $ 0.38
Second Quarter........ 3,733 2,820 0.45
Third Quarter...... 3,425 2,608 0.42
Fourth Quarter......... 3,491 2,637 0.41
--------- -------- --------
$ 13,813 $ 10,389 $ 1.66
======== ======== ========
</TABLE>
F-15
<PAGE> 43
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. QUARTERLY FINANCIAL DATA: (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
(In Thousands, except earnings per share)
Earnings Per
Revenues Net Income Share
---------- ----------- -------------
<S> <C> <C> <C>
First Quarter.......... $ 1,907 $ 1,345 $ 0.38
Second Quarter......... 2,226 1,314 0.37
Third Quarter.......... 2,939 2,178 0.37
Fourth Quarter......... 3,077 2,340 0.39
--------- ------- ---------
$ 10,148 $ 7,177 $ 1.51
========= ======= =========
</TABLE>
F-16
<PAGE> 44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*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
23.1 Consent of Independent Accountants
27 Financial Data Schedule
- --------------------
* 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.
*** Previously filed with the commission as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.
**** 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 21
SUBSIDIARIES OF REGISTRANT
STATE
OF
COMPANY INCORPORATION
------- -------------
PMC Commercial Limited Partnership Delaware
PMC Commercial Corp. Delaware
E-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
PMC Commercial Trust on Form S-3 (File No. 333-24767) of our report dated
February 19, 1998, on our audits of the consolidated financial statements of
PMC Commercial Trust as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996, and 1995, which report is included in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1997 FORM 10-K OF PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4
<SECURITIES> 32
<RECEIVABLES> 109,846<F1>
<ALLOWANCES> (60)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,877<F2>
<CURRENT-LIABILITIES> 5,914<F3>
<BONDS> 18,721
0
0
<COMMON> 91,751
<OTHER-SE> (509)
<TOTAL-LIABILITY-AND-EQUITY> 115,877
<SALES> 0
<TOTAL-REVENUES> 13,813
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,726
<INCOME-PRETAX> 10,389
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,389
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
<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 9
(ii) Deferred borrowing costs 280
(iii) Restricted investments 5,766
------
$6,055
======
<F3>Includes the following items not included above:
(i) Dividends payable 2,749
(ii) Other liabilities 193
(iii) Interest payable 182
(iv) Borrower advances 1,431
(v) Unearned commitment fees 948
(vi) Due to affiliates 344
(vii) Unearned construction
monitoring fees 67
------
$5,914
======
</FN>
</TABLE>
