<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[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: 1-13610
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.)
18111 PRESTON ROAD, SUITE 600, 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/A
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form
10-K
Report
Item Page
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<S> <C> <C>
PART I
1. Business ........................................................ 1
2. Properties....................................................... 12
3. Legal Proceedings................................................ 12
4. Submission of Matters to a Vote of Security Holders.............. 12
PART II
5. Market for the Registrant's Common Equity and Related Shareholder
Matters........................................................ 13
6. Selected Consolidated Financial Data............................. 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
7A. Quantitative and Qualitative Disclosures about Market Risk....... 23
8. Consolidated Financial Statements and Supplementary Data......... 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 23
PART III
10. Directors and Executive Officers of the Registrant............... 24
11. Executive Compensation........................................... 24
12. Security Ownership of Certain Beneficial Owners and Management... 24
13. Certain Relationships and Related Transactions................... 24
PART IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K................................................... 25
Glossary................................................................ 26
Signatures.............................................................. 27
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 investment management
agreements (the "Investment Management Agreements") with PMC Advisers, LTD
("PMC Advisers" or the "Investment Manager"), an indirect wholly-owned
subsidiary of PMC Capital, Inc. ("PMC Capital"). See "-- Investment Manager."
The Company, PMC Capital and PMC Advisers are managed by the same executive
officers. Three of the seven trust managers of the Company are directors of PMC
Capital. PMC Capital is primarily engaged in the business of originating loans
to small businesses under loan guarantee and funding programs sponsored by the
Small Business Administration (the "SBA"). The Company was organized to provide
loans to persons or entities whose borrowing needs and/or strength and
stability exceed the limitations set for SBA approved loan programs. As a
result, the Company and PMC Capital generally pursue different prospective
borrowers. In order to further mitigate the potential for conflicts of
interest, the Company, PMC Capital and PMC Advisers have entered into a Loan
Origination Agreement. Pursuant to the Loan Origination Agreement, loans which
meet the Company's underwriting criteria are to be first presented to the
Company for funding. If the Company does not have available funds, origination
opportunities presented to the Company may be originated by PMC Capital or its
subsidiaries. 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. 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. 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"). In connection with the Private
Placement, the Notes received a "AA" rating from Duff & Phelps Credit Rating
Co. The Partnership was established to enable the Company to complete the
structured financing of certain of the Company's loans through the Private
Placement. All of the limited partnership interests in the Partnership are
owned by the Company, and the general partner is a corporation owned by the
Company. Pursuant to the structured financing, the Partnership acquired, in a
one-time transaction, approximately $40.1 million aggregate principal amount of
outstanding loans from the Company. At December 31, 1997, approximately $25.4
million of those loans and approximately $18.4 million aggregate principal
amount of Notes remained outstanding. The Partnership issued the Notes, which
were secured by the loans acquired from the Company and paid to the Company, as
consideration for the loans, the proceeds from the offering. The Partnership's
assets consist solely of the loans acquired from the Company, and funds held in
collateral accounts related to collections on the loans and a required cash
reserve account. The Partnership conducts no business activity other than
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to make periodic principal and interest payments on the outstanding Notes. The
Company, through PMC Advisers, services the loans sold to the Partnership.
Fourth, the Company intends to selectively invest in commercial real estate.
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 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
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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.
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.
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<TABLE>
<CAPTION>
INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED (2)
(IN THOUSANDS)
INTEREST RATES
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ORIGINATED 9.90-10.49% 10.50-10.99% 11.00-11.49% 11.50-11.99% 12.00-12.25% TOTAL
----------------- ----------- ------------ ------------ ------------ ------------ -----
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.
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>
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<TABLE>
<CAPTION>
LOANS ORIGINATED OR PURCHASED BY QUARTER (1)
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 3,594
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.
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
OF OPERATIONS)
YEARS ENDED TO
DECEMBER 31, 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>
- ---------------
(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
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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 terms of the Notes provide that the
Partner of the Partnership are not liable for any payments on the Notes.
Accordingly, if the Partnership fails to pay the Notes, the sole recourse of the
holders of the Notes is against the assets of the Partnership. The Company,
therefore, has no obligation to pay the Notes nor do the holders of the Notes
have any recourse against the assets of the Company. 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.
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
historical or projected debt coverage tests determined on a case-by-case basis
as described below, and (iv) have principals with satisfactory credit histories
and provide personal guarantees, as applicable. The Company evaluates a number
of factors to determine the credit worthiness of the prospective borrower and
the amount of required debt coverage for the prospective borrower,
including:
o The components of the borrower's collateral, for example, real
estate, equipment or marketable securities;
o The ease with which the collateral can be liquidated;
o The industry and competitive environment in which the borrower
operates;
o The financial strength of the guarantors;
o The existence of any secondary repayment sources; and
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o The existence of a franchise relationship.
INVESTMENT POLICIES
The Company's principal investment objective is to obtain current
income from interest payments and other related fee income on its invested
assets for distributions to its shareholders. The Company's investment policies
are established by the Company's Board of Trust Managers. The trust managers
may amend or revise these policies from time to time in their sole discretion
without a vote of the Company's shareholders. Management of the Company,
therefore, has broad discretion in evaluating and pursuing investment
opportunities. As a result, the Company may, in the future, expand its lending
activities to finance real estate investors who are not operators of the
properties financed or invest in different types of assets such as directly
owning real estate. Pursuant to the Company's current 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").
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.
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.
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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
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<PAGE> 11
being assisted. The Company generally requires at least 15% of the equity in a
project to be contributed by the principals of the borrower. The first mortgage
is not guaranteed by the SBA. Although the total size of projects utilizing the
SBA 504 Program guarantees are unlimited, the maximum amount of subordinated
debt in any individual project generally is $750,000 (or $1 million for certain
projects). Typical project costs range in size from $500,000 to $2.5 million. A
business eligible for financing pursuant to the SBA 504 Program must (i) be a
for-profit corporation, partnership or proprietorship, (ii) not exceed $6
million in net worth, and (iii) not exceed $2 million in average net income
(after Federal income taxes) for each of the previous two years. Financing
pursuant to the SBA 504 Program cannot be used for working capital or
inventory, consolidating or repaying debt or financing a plant not located in
the U.S. or its possessions. As of December 31, 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
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<PAGE> 12
extent it distributes at least 95% of its REIT taxable income to shareholders.
The Company may, however, be subject to certain Federal excise taxes and state
and local taxes on its income and property. REITs are subject to a number of
organizational and operational requirements under the Code.
INVESTMENT MANAGER
The investments of the Company are managed by PMC Advisers pursuant to
the Investment Management Agreements. Effective July 1, 1996, one of the
Investment Management Agreements 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 such Investment Management Agreement.
Through June 30, 1996, 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 Agreements, 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.
The fee of PMC Advisers is primarily based on the value of the
Company's assets. As a result, any increases in the dollar amount of the
Company's assets will benefit PMC Advisers, and PMC Advisers will have a
potential conflict in determining whether to advise the Company to write down
the value of any assets. In order to mitigate the risk to the Company from
increasing its asset base through leveraged transactions, the Investment
Management Agreements provide PMC Advisers with a reduced fee for any asset
acquired through additional
10
<PAGE> 13
borrowings. Additionally, the potential conflict for the management of PMC
Advisers between the Company and PMC Capital is mitigated through the Loan
Origination Agreement described above.
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.
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."
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<PAGE> 14
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.
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.
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<PAGE> 15
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>
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<PAGE> 16
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
Year 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 $ --
Return on average assets (1) ..... 8.6% 7.6% 8.8% 6.5% $ --
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.
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<PAGE> 17
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"), as modified by SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." In accordance with SFAS No. 114, 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
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<PAGE> 18
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.
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. Interest income-loans represents income to the
Company generated primarily by interest earned on the Company's outstanding
loans and the accretion of deferred commitment fees of approximately $674,000
and $283,000 for the years ended December 31, 1997 and 1996, respectively.
These commitment fees are non-refundable fees, collected as part of the
origination of a loan. These fees, net of related expenses, are recognized over
the period the applicable loans are anticipated to be outstanding. Interest
income-loans is dependent on the interest rates of the Company's outstanding
loans and the dollar volume of outstanding loans. If the Company is required to
borrow funds to generate loan originations, the Company's net income will be
dependent upon the spread at which it borrows funds and the rate at which the
Company loans those funds. See "Business -- Interest Rate and Prepayment Risk."
Over the past several years, that spread has decreased thereby reducing the
Company's net profits related to leverage. The Company believes rates at which
the Company can loan its money will continue at historical lows over the next
year thereby requiring the Company to increase its outstanding loan portfolio,
its fees related to lending operations or its revenues from new REIT-related
activities in order to increase net income.
This $3.9 million increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the year ended December 31, 1997 as a result of the completion of the lending
of all proceeds generated by the Private Placement and the Offering. 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.
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. Interest and dividends-other
investments is primarily generated by the investment of the Company's available
funds in short-term investments pending the origination of loans with such
funds. Interest and dividends - other investments will temporarily increase
following completion of a financing by the Company. The complete use of the
financing proceeds may take between three months and one year depending on the
amount of the proceeds, the availability of lending opportunities and the
Company's outstanding unfunded commitments. 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. Since the components of other income are primarily
attributable to lending activities, other income will generally fluctuate with
the Company's lending activities. This increase in other income 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. During the year ended December 31,
1997, approximately $18.3 million on 18 loans was prepaid in full. Prepayment
fees result in one-time increases in the Company's income, but will result in a
long-term reduction in income to the extent the Company is unable to generate
new loans with the proceeds of such prepayments with interest rates equal to or
greater than the rates of the loans which were prepaid. Prepayments generally
increase during times of declining interest rates. The Company experienced a
158% increase in the dollar amount of loans which prepaid during 1997 as
compared to 1996. While the Company
16
<PAGE> 19
anticipates loan prepayments in 1998 will be in amounts comparable to or
slightly less than 1997, it is difficult to predict the amount of prepayments
with any accuracy. The borrower's decision to prepay will depend on factors
such as prepayment penalties and the availability of alternative lending
sources. As interest rates remain at historical lows, borrowers appear more
willing to pay the prepayment penalties in order to obtain the lower interest
rates. This apparent willingness, coupled with increased lending competition,
could result in higher than anticipated prepayments. See "Business --
Prepayment Considerations" and "-- Interest Rate and Prepayment Risk."
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 (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.
17
<PAGE> 20
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. Interest income-loans represents income to the Company generated
primarily by interest earned on the Company's outstanding loans and the
accretion of deferred commitment fees of approximately $283,000 and $197,000
during the years ended December 31, 1996 and 1995, respectively. These
commitment fees are non-refundable fees, collected as part of the origination
of a loan. These fees, net of related expenses, are recognized over the period
the applicable loans are anticipated to be outstanding. Interest income-loans
is dependent on the interest rates of the Company's outstanding loans and the
dollar volume of outstanding loans. If the Company is required to borrow funds
to generate loans originations, the Company's net income will be dependent upon
the spread at which it borrows funds and the rate at which the Company loans
those funds. See "Business-Interest Rate and Prepayment Risk." Over the past
several years, that spread has decreased thereby reducing the Company's net
profits related to leverage.
This $2,918,000 increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the year ended December 31, 1996 as a result of the lending of the proceeds
generated by the Private Placement and the Offering. 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 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. Interest and dividends-other
investments is primarily generated by the investment of the Company's available
funds in short-term investments pending the origination of loans with such
funds. Interest and dividends - other investments will temporarily increase
following completion of financing by the Company. The complete use of the
financing proceeds may take between three months and one year depending on the
amount of the proceeds, the availability of lending opportunities and the
Company's outstanding unfunded commitments. The average short-term investments
of the Company increased by $16 million (267%) from $6 million during the year
ended December 31, 1995, to $22 million during the year ended December 31,
1996. The average yields on short-term investments during the years ended
December 31, 1996 and 1995 were approximately 5.7% and 5.5%, respectively.
Other income increased by $90,000 (31%) from $295,000 during the year
ended December 31, 1995, to $385,000 during the year ended December 31, 1996.
Other income consists of: (i) amortization of construction monitoring fees,
(ii) prepayment penalties, (iii) late fees and other loan fees, and (iv) other
miscellaneous collections. The increase was primarily attributable to other
loan fees collected during 1996, such as assumption fees ($59,000) and
modification fees ($41,000). The increase was offset by a $6,000 decrease in
construction monitoring fees on construction hotel/motel projects in process
recognized as income from $146,000 during the year ended December 31, 1995 to
$140,000 during the year ended December 31, 1996.
Expenses, other than interest expense, consisted primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to the Company's
officers (other than stock options) and the cost of office space, equipment and
other personnel required for the Company's day-to-day operations. The expenses
paid by the Company include direct transaction costs incident to the
acquisition and disposition of investments, corporate legal and auditing fees
and expenses, the fees and expenses of the Company's independent trust
managers, the costs of printing and mailing proxies and reports to
18
<PAGE> 21
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.
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).
19
<PAGE> 22
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 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
20
<PAGE> 23
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 believes that these financing sources will
enable the Company to generate funds sufficient to meet both its short-term and
long-term capital needs. The ability of the Company to continue its historical
growth, however, will depend on its ability to borrow funds and/or issue equity
on acceptable terms. 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.
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 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."
21
<PAGE> 24
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.
22
<PAGE> 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
23
<PAGE> 26
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.
24
<PAGE> 27
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.
25
<PAGE> 28
GLOSSARY
The following terms as used on this Form 10-K are briefly defined
below:
<TABLE>
<S> <C>
Average Annual Value of All Assets The book value of total
assets of the Company or any
Person wholly-owned
(directly or indirectly) by
the Company determined in
accordance with GAAP on the
first day of the year and on
the last day of each quarter
of such year, divided by
five.
Average Common Equity Capital The Common Equity Capital on
the first day of the year
and on the last day of each
quarter of such year,
divided by five.
Average Quarterly Value of All Assets The book value of total
assets of the Company or any
Person wholly-owned
(directly or indirectly) by
the Company determined in
accordance with GAAP on the
first day of the quarter and
on the last day of the
quarter, divided by two.
Average Quarterly Value of All Invested Assets The book value of Invested
Assets of the Company or any
Person of wholly-owned
(directly or indirectly) by
the Company, determined in
accordance with GAAP on the
first day of the quarter and
on the last day of the
quarter, divided by two.
Average Quarterly Value of Common Equity Capital Common Equity Capital on the
first day of the 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 Managers The trust managers of the
Company who are not
affiliated with PMC Capital
or its subsidiaries.
Invested Assets The Primary Investments plus
the Other Investments.
Return on Average Equity Net Income of the Company as
determined in accordance
with GAAP, less Common
Equity Capital preferred
dividends, if any, divided
by the Average Common Equity
Capital.
</TABLE>
26
<PAGE> 29
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 February 19, 1999
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 February 19, 1999
----------------------------------- Managers, Chief Operating
Dr. Andrew S. Rosemore Officer and Trust Manager
/s/ Lance B. Rosemore President, Chief Executive February 19, 1999
----------------------------------- Officer, Secretary and Trust
Lance B. Rosemore Manager (principal executive
officer)
/s/ Barry N. Berlin Chief Financial Officer (principal February 19, 1999
----------------------------------- financial and accounting
Barry N. Berlin officer)
/s/ Irving Munn Trust Manager February 19, 1999
-----------------------------------
Irving Munn
/s/ Roy H. Greenberg Trust Manager February 19, 1999
-----------------------------------
Roy H. Greenberg
/s/ Nathan Cohen Trust Manager February 19, 1999
-----------------------------------
Nathan Cohen
/s/ Dr. Ira Silver Trust Manager February 19, 1999
-----------------------------------
Dr. Ira Silver
/s/ Dr. Martha Greenberg Trust Manager February 19, 1999
-----------------------------------
Dr. Martha Greenberg
</TABLE>
27
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* Declaration of Trust
3.1(a)* Amendment No. 1 to Declaration of Trust
3.1(b)** Amendment No. 2 to Declaration of Trust
3.2* Bylaws
4.* Instruments defining the rights of security holders. The
instruments filed in response to items 3.1 and 3.2 are
incorporated in this item by reference.
10.1*** Investment Management Agreement between the Company and
PMC Advisers, Inc.
10.2* 1993 Employee Share Option Plan
10.3* 1993 Trust Manager Share Option Plan
10.4* Form of Dividend Reinvestment Plan
10.5* Loan Origination Agreement
10.6**** Revolving Credit Facility
10.7**** Structured Financing
21***** Subsidiary of the Registrant
27***** Financial Data Schedule
</TABLE>
* Previously filed as an exhibit to the Company's Registration Statement of
Form S-11 filed with the Commission on June 25, 1993, as amended (Registration
No. 33-65910), and incorporated herein by reference.
** Previously filed with the commission as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.
*** 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.
***** Previously filed with the Commission as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated by reference herein.
E-1
<PAGE> 31
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE
OF
COMPANY INCORPORATION
------- -------------
<S> <C>
PMC Commercial Limited Partnership Delaware
PMC Commercial Corp. Delaware
</TABLE>
E-2
<PAGE> 32
PMC COMMERCIAL TRUST
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants...................................... F-2
Financial Statements:
Consolidated Balance Sheets....................................... F-3
Consolidated Statements of Income................................. F-4
Consolidated Statements of Beneficiaries' Equity.................. F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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.
F-8
<PAGE> 40
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE:
The Company primarily originates loans: (i) to small business enterprises
that exceed the net worth, asset, income, number of employee or other
limitations applicable to the Small Business Administration ("SBA") programs
utilized by PMC Capital or (ii) in excess of $1.1 million to small business
enterprises without regard to SBA eligibility requirements. Such loans are
primarily collateralized by first liens on real estate and are subject to the
Company's underwriting criteria.
The principal amount of loans originated by the Company generally have
not exceeded 70% of the lesser of fair value or cost of the real estate
collateral unless credit enhancements such as additional collateral or third
party guarantees were obtained. Loans originated or purchased by the Company
typically provide interest payments at fixed rates, although the Company may
also originate and purchase variable rate loans. Loans generally have
maturities ranging from five to 20 years. Most loans provide for scheduled
amortization and often have a balloon payment requirement. In most cases,
borrowers are entitled to prepay all or part of the principal amount subject to
a prepayment penalty depending on the terms of the loan.
During the years ended December 31, 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.
F-9
<PAGE> 41
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$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
F-10
<PAGE> 42
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DUE TO AFFILIATES: (CONTINUED)
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,
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,
F-11
<PAGE> 43
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. BENEFICIARIES' EQUITY: (CONTINUED)
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.
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.
F-12
<PAGE> 44
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHARE OPTION PLANS: (CONTINUED)
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.
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.
F-13
<PAGE> 45
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHARE OPTION PLANS: (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -----------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE 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 PROFORMA
----------- --------- ----------- --------- ----------- --------
<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.
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
F-14
<PAGE> 46
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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-15
<PAGE> 47
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.
F-16
<PAGE> 48
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
1997
---------------------------------------
(In Thousands, except earnings per share)
<TABLE>
<CAPTION>
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>
1996
---------------------------------------
(In Thousands, except earnings per share)
<TABLE>
<CAPTION>
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-17
