1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22148
-------------------
PMC COMMERCIAL TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-6446078
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17290 Preston Road, 3rd Floor,
Dallas, TX 75252 (972) 380-0044
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of November 1, 1996, Registrant had outstanding 6,021,772 Common Shares of
Beneficial Interest, par value $.01 per share.
2
PMC COMMERCIAL TRUST
INDEX
PART I. Financial Information PAGE NO.
--------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income -
Nine Months Ended September 30, 1996 and 1995 3
Three Months Ended September 30, 1996
and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996
and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 17
3
PART I
Financial Information
ITEM 1.
Financial Statements
1
4
PMC COMMERCIAL TRUST
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------- -------------
ASSETS (Unaudited)
Investments:
Loans receivable, net .............................................. $ 80,155,358 $ 59,129,536
Cash equivalents ................................................... 36,133,586 173,679
Restricted investments ............................................. 2,502,968 --
------------- -------------
Total investments .................................................... 118,791,912 59,303,215
------------- -------------
Other assets:
Cash ............................................................... 11,803 33,504
Interest receivable ................................................ 484,245 410,073
Deferred borrowing costs ........................................... 397,867 --
Other assets, net .................................................. 91,229 50,483
------------- -------------
Total other assets ................................................... 985,144 494,060
------------- -------------
Total assets ......................................................... $ 119,777,056 $ 59,797,275
============= =============
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable ...................................................... $ 27,847,563 $ 7,920,000
Dividends payable .................................................. 2,307,620 1,518,896
Accounts payable ................................................... 47,128 14,175
Interest payable ................................................... -- 56,267
Borrower advances .................................................. 3,668,640 579,133
Unearned commitment fees ........................................... 1,105,955 599,978
Due to affiliates .................................................. 11,895 844,786
Unearned construction monitoring fees .............................. 189,607 81,008
------------- -------------
Total liabilities .................................................... 35,178,408 11,614,243
------------- -------------
Beneficiaries' equity:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 5,993,818 and
3,491,716 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively ........................... 59,938 34,917
Additional paid-in capital ......................................... 84,864,849 48,326,337
Cumulative net income .............................................. 12,948,254 8,111,318
Cumulative dividends ............................................... (13,274,393) (8,289,540)
------------- -------------
Total beneficiaries' equity .......................................... 84,598,648 48,183,032
------------- -------------
Total liabilities and beneficiaries' equity .......................... $ 119,777,056 $ 59,797,275
============= =============
Net asset value per share ............................................ $ 14.11 $ 13.80
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
2
5
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
------------ ------------
Revenues:
Interest income - loans ...................... $ 5,940,964 $ 3,904,196
Interest and dividends - other investments ... 824,020 324,046
Other income ................................. 306,094 199,718
------------ ------------
Total revenues ................................. 7,071,078 4,427,960
------------ ------------
Expenses:
Advisory and servicing fees, net ............. 799,764 654,666
Legal and accounting fees .................... 39,393 56,125
General and administrative ................... 94,358 89,581
Interest ..................................... 1,300,627 59,439
------------ ------------
Total expenses ................................. 2,234,142 859,811
------------ ------------
Net income ..................................... $ 4,836,936 $ 3,568,149
============ ============
Net income per share ........................... $ 1.12 $ 1.03
============ ============
Weighted average shares outstanding ............ 4,324,154 3,445,660
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
6
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
1996 1995
------------ ------------
Revenues:
Interest income - loans ...................... $ 2,185,996 $ 1,520,418
Interest and dividends - other investments ... 565,252 7,206
Other income ................................. 187,272 64,120
------------ ------------
Total revenues ................................. 2,938,520 1,591,744
------------ ------------
Expenses:
Advisory and servicing fees, net ............. 193,201 280,559
Legal and accounting fees .................... 13,756 8,635
General and administrative ................... 37,798 22,660
Interest ..................................... 515,646 25,147
------------ ------------
Total expenses ................................. 760,401 337,001
------------ ------------
Net income ..................................... $ 2,178,119 $ 1,254,743
============ ============
Net income per share ........................... $ 0.37 $ 0.36
============ ============
Weighted average shares outstanding ............ 5,859,901 3,447,271
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
7
PMC COMMERCIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 4,836,936 $ 3,568,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of:
Discount on purchased loans ................... (21,811) (19,574)
Deferred commitment fees ...................... (410,703) (337,641)
Construction monitoring fees .................. (109,129) (129,938)
Amortization of organization and borrowing costs .. 58,615 6,030
Commitment fees collected ......................... 1,198,275 519,680
Construction monitoring fees collected, net ....... 217,728 27,798
Changes in operating assets and liabilities:
Accrued interest receivable ................... (74,172) (127,209)
Other assets .................................. (46,776) --
Deferred borrowing costs ...................... (450,452) --
Interest payable .............................. (56,267) --
Borrower advances ............................. 3,089,507 (1,188,800)
Due to affiliates ............................. (832,891) 318,485
Accounts payable .............................. 32,953 2,541
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............... 7,431,813 2,639,521
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded .......................................... (26,586,654) (24,879,204)
Principal collected ................................... 5,301,048 4,117,226
Investment in restricted cash ......................... (2,502,968) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................... (23,788,574) (20,761,978)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares .............. 36,996,314 60,541
Proceeds from issuance of notes payable .............. 39,140,770 2,390,000
Payment of dividends ................................. (4,077,280) (3,130,229)
Payment of stock offering costs ...................... (551,630) --
Payment of principal on notes payable ................ (19,213,207) (40,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..... 52,294,967 (719,688)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 35,938,206 (18,842,145)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......... 207,183 18,850,103
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................ $ 36,145,389 $ 7,958
============ ============
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested ................................. $ 118,849 $ 21,759
============ ============
Dividends declared, not paid ......................... $ 2,307,620 $ 1,138,594
============ ============
Interest paid ........................................ $ 1,306,076 $ 30,747
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
8
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of PMC Commercial
Trust ("PMC Commercial") and its subsidiaries (collectively the "Company") as
of and for the three and nine months ended September 30, 1996 and 1995 have not
been audited by independent accountants. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the Company's financial position at September 30, 1996, results
of operations for the three and nine months ended September 30, 1996 and 1995,
and cash flows for the nine months ended September 30, 1996 and 1995. These
adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1995 Annual
Report on Form 10-K.
The results for the nine months ended September 30, 1996, are not
necessarily indicative of future financial results.
NOTE 2. BASIS FOR CONSOLIDATION
On March 7, 1996, PMC Commercial Receivable Limited Partnership, a
Delaware limited partnership ("PCR" or "the Partnership"), and PMC Commercial
Corp., a Delaware corporation, were formed. PMC Commercial Corp. is the
general partner for PCR. The consolidated financial statements include the
accounts of PMC Commercial, PMC Commercial Corp. and PCR. PMC Commercial owns
100% of PMC Commercial Corp. and directly or indirectly all of the partnership
interests of PCR (see Note 5).
NOTE 3. DIVIDENDS TO BENEFICIARIES
During the three and nine month periods ended September 30, 1996, PMC
Commercial declared dividends to its shareholders of beneficial interest of
$0.385 and $1.135 per share, respectively.
NOTE 4. DUE TO AFFILIATE
Pursuant to an investment management agreement (the "Investment
Management Agreement") between the Company and PMC Advisers, Inc., an
affiliated entity (the "Investment Manager"), the Company incurred fees of
approximately $1.3 million for the nine months ended September 30, 1996. Of
the amount of servicing and advisory fees paid or payable to the Investment
Manager as of September 30, 1996, $219,500 has been offset against commitment
fees as a direct cost of originating loans.
6
9
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DUE TO AFFILIATE (CONTINUED)
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 pursuant to the Investment Management Agreement as a cost of issuing
its common shares (see Note 6), which has been offset against additional paid-in
capital on the accompanying September 30, 1996 consolidated balance sheet.
Pursuant to the amended Investment Management Agreement, the quarterly
servicing and advisory fee (the "Base Fee") is equal to (i) 0.4167% (1.67% on
an annual basis) of the lesser of (a) the average quarterly value of common
equity capital or (b) the average quarterly value of all invested assets and
(ii) 0.21875% (0.875% on an annual basis) of the difference between the average
quarterly value of all invested assets and the average quarterly value of
common equity capital. For purposes of calculating the Base Fee, the average
quarterly value of common equity capital is not increased by the proceeds
received from any public offering of common shares by the Company (other than
pursuant to the Company's dividend reinvestment plan or any employee/trust
manager benefit plan) during the 180 calendar day period immediately following
such public offering. In no event will the aggregate annual fees charged under
the new agreement be greater than that which would have been charged had there
been no revision to the Investment Management Agreement.
NOTE 5. NOTES PAYABLE
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
mature in 2016 and bear interest at the rate of 6.72% per annum, are
collateralized by approximately $39.7 million of loans contributed by PMC
Commercial to the Partnership at inception (of which $37.7 million remained
outstanding at September 30, 1996). In connection with this private placement,
the Notes were given a rating of "AA" by Duff and Phelps Credit Rating Co. The
loans were originated or purchased by PMC Commercial in accordance with its
underwriting criteria. 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 on the
accompanying consolidated balance sheets. The net proceeds from the issuance of
the Notes (approximately $27.1 million after giving effect to costs of $500,000
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 outstanding borrowings under its
revolving credit facility and to make additional loans in accordance with its
underwriting criteria. Approximately $27.9 million remained outstanding under
the Notes at September 30, 1996.
7
10
PMC COMMERCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFICIARIES' EQUITY
On July 2, 1996, PMC Commercial completed the sale of 2 million of its
common shares of beneficial interest ("Common Shares") in a public offering and
60,000 Common Shares in a directed public offering (collectively, "the
Offering"). The shares were sold at $15.625 per share, resulting in net
proceeds to PMC Commercial of $30.4 million. In July 1996, PMC Commercial sold
an additional 275,000 Common Shares pursuant to the exercise of the over-
allotment option by the underwriters of the Offering, for additional net
proceeds of approximately $4.1 million. The proceeds of the Offering are being
used to make additional loans in accordance with the Company's underwriting
criteria. The Company incurred approximately $552,000 in costs in connection
with the Offering which were offset against additional paid-in capital on the
accompanying September 30, 1996 consolidated balance sheet.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities."
Those standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered and liabilities
are extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and may only be applied prospectively.
8
11
PART I
Financial Information
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
PMC Commercial was incorporated in June 1993 and had no operations prior
to completion of its initial public offering (the "IPO") on December 28, 1993.
The net proceeds to the Company from the IPO were $47.7 million, including
over-allotment options.
During the three and nine months ended September 30, 1996, the Company funded
$13 million and $26.6 million, respectively, of loans, all to businesses
operating in the lodging industry. During the years ended December 31, 1995
and 1994, the Company originated and funded or purchased loans with a face
value of $31.7 million and $35.2 million, respectively. As of September 30,
1996, the total portfolio outstanding was $81.5 million ($80.2 million after
reductions for loans purchased at a discount and deferred commitment fees) with
a weighted average contractual interest rate of approximately 11.1%. The
weighted average contractual interest rate does not include the effects of the
amortization of discount on purchased loans or commitment fees on funded loans.
Loans are collateralized primarily by first liens on real estate and are
guaranteed, for all but one loan, by the principals of the businesses financed.
Included in outstanding loans at September 30, 1996 is $2.7 million which was
advanced pursuant to the Small Business Administration Section 504 loan program
(the "SBA 504 program"). Interest rates charged on such advances are
comparable to those 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 period.
Actual results could differ from those estimates.
The Company follows the accounting practices prescribed by the American
Institute of Certified Public Accountants - Accounting Standards Division in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Company's Board of Trust Managers
when significant doubt exists as to the ultimate collectability of one or more
loans. To date, no loss reserves have been established. The determination of
whether significant doubt exists and whether a loss provision is necessary for
each loan requires judgment and consideration of the facts and circumstances
existing at the evaluation date. Changes to the facts and circumstances of the
borrower, the lodging industry and the economy may require the establishment of
significant loss reserves. At such time as a determination is made that there
exists significant doubt as to the ultimate collectability of one or more loans
requiring the establishment of a loss reserve, the effect to operating results
may be material.
9
12
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
The net income of the Company during the nine months ended September 30,
1996 and 1995, was $4.8 million and $3.6 million, $1.12 and $1.03 per share,
respectively. The Company's earnings per share during the nine months ended
September 30, 1996 includes the effect of the issuance of 2,335,000 common
shares of beneficial interest issued pursuant to a public offering in July 1996
(the "Offering").
Interest income - loans increased by $2.0 million (51%), from $3.9
million during the nine months ended September 30, 1995, to $5.9 million during
the nine months ended September 30, 1996. This increase was primarily
attributable to: (i) the reallocation of the Company's initial investment of
the proceeds of the IPO from cash and U.S. Government securities to higher-
yielding loans to small businesses and (ii) portfolio growth from the proceeds
of borrowing arrangements and the Offering in July 1996. The average invested
assets in loans to small businesses increased by $23.8 million (54%), from
$43.7 million during the nine months ended September 30, 1995, to $67.5
million during the nine months ended September 30, 1996. The annualized
average yields on loans for the nine months ended September 30, 1996 and 1995
were approximately 12.1% for both periods. Interest income - loans includes
interest earned on loans, the accretion of discount on purchased loans
(approximately $21,800 and $19,600 during the nine months ended September 30,
1996 and 1995, respectively) and the accretion of deferred commitment fees
(approximately $191,000 and $144,000 during the nine months ended September 30,
1996 and 1995, respectively).
Interest and dividends - other investments increased by $500,000 (154%),
from $324,000 during the nine months ended September 30, 1995, to $824,000
during the nine months ended September 30, 1996. This increase was due to the
increase in funds available for short-term investments. The proceeds from the
IPO were initially invested in government securities and money market funds
until small business loans were funded. The Company completed a structured
financing in March 1996, which resulted in net proceeds of $27.1 million, and
the Offering in July 1996, which resulted in net proceeds of $34.5 million.
These proceeds were initially invested in short-term investments and are being
used to make loans in accordance with the Company's underwriting criteria. The
average short-term investments of the Company increased by $14.5 million
(188%), from $7.7 million during the nine months ended September 30, 1995, to
$22.2 million during the nine months ended September 30, 1996. The average
yields on short-term investments during the nine months ended September 30,
1996 and 1995 were approximately 5.0% and 5.6%, respectively.
Other income increased by $106,000 (53%), from $200,000 during the nine
months ended September 30, 1995, to $306,000 during the nine months ended
September 30, 1996. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment penalties, (iii) late and other loan fees and
(iv) miscellaneous collections. The increase was primarily due to an increase
in the collection of loan-related fees, such as assumption, modification and
extension fees, of $89,000 from $23,000 during the nine months ended September
30, 1995 to $112,000 during the nine months ended September 30, 1996.
Additionally, the income recognized from prepayment penalties increased by
$20,500 from $51,500 during the nine months ended September 30, 1995 to $72,000
during the nine months ended September 30, 1996. These increases were offset
by a decrease in income recognized from the monitoring of hospitality
construction projects in process of $21,000, from $130,000 during the nine
months ended September 30, 1995, to $109,000 during the nine months ended
September 30, 1996.
10
13
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 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, corporate 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 PMC Commercial'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. Pursuant to the amended Investment Management Agreement, the Company
incurred an aggregate of $1.3 million in management fees for the nine months
ended September 30, 1996, $251,000 of which were incurred as a cost of the
Offering. Of the total management fees paid or payable to the Investment
Manager during the nine months ended September 30, 1996, $219,500 has been
offset against commitment fees as a direct cost of originating loans and the
$251,000 described above has been offset against additional paid-in capital.
Investment management fees were $848,000 for the nine months ended September
30, 1995. Of the total management fees paid or payable to the Investment
Manager during the nine months ended September 30, 1995, $193,000 was offset
against commitment fees as a direct cost of originating loans. The increase in
investment management fees of $452,000 (prior to offsetting direct costs
related to the origination of loans and the issuance of the Company's Common
Shares), or 53 %, is primarily due to: (i) the average quarterly invested
assets (as defined by the Investment Management Agreement), which increased by
$24.2 million, or 47%, from $51.2 million during the quarter ended September
30, 1995, to $75.4 million during the quarter ended September 30, 1996, (ii)
average quarterly total assets (as defined by the Investment Management
Agreement), which increased by $32.7 million, or 62%, from $52.8 million during
the quarter ended September 30, 1995, to $85.5 million during the quarter ended
September 30, 1996, and (iii) average quarterly common equity (as defined by
the Investment Management Agreement), which increased by $3 million, or 6%,
from $47.8 million during the quarter ended September 30, 1995, to $50.8
million during the quarter ended September 30, 1996. All quarterly averages
were calculated pursuant to the Investment Management Agreement.
Legal and accounting fees decreased by $17,000 (30%), from $56,000
during the nine months ended September 30, 1995, to $39,000 during the nine
months ended September 30, 1996. This decrease is attributable to billing of
accounting and corporate legal fees during the nine months ended September 30,
1995.
General and administrative expenses increased by $4,000 (4%), from
$90,000 during the nine months ended September 30, 1995, to $94,000 during the
nine months ended September 30, 1996. This increase is primarily attributable
to an increase in costs related to printing expenses and the Company's
structured financing and revolving credit facility during the nine months ended
September 30, 1996.
Interest expense of approximately $1.3 million during the nine months
ended September 30, 1996 relates primarily to interest on the structured
financing (approximately $1.1 million), interest on the Company's revolving
credit facility (approximately $138,000), the amortization of deferred
borrowing costs (approximately $53,000) and interest incurred on borrower
advances (approximately $24,000). The obligation to pay interest on borrower
advances is included in borrower advances on
11
14
the accompanying consolidated balance sheets. During the nine months ended
September 30, 1995, interest expense on the Company's revolving credit facility
was approximately $16,000 and interest expense on borrower advances was
$43,000.
As the Company is currently qualified as a Real Estate Investment Trust
("REIT") under the applicable provisions of the Internal Revenue Code of 1986,
as amended ("the Code"), there are no provisions in the financial statements
for Federal income taxes.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
The net income of the Company during the three months ended September
30, 1996 and 1995, was $2.2 million and $1.3 million, $0.37 and $0.36 per
share, respectively. The Company's earnings per share during the three months
ended September 30, 1996, includes the effect of the issuance of 2,335,000
common shares of beneficial interest issued pursuant to the Offering in July
1996.
Interest income - loans increased by $700,000 (47%), from $1.5 million
during the three months ended September 30, 1995, to $2.2 million during the
three months ended September 30, 1996. This increase was primarily
attributable to (i) the reallocation of the Company's initial investment of
the proceeds of the IPO in cash and U.S. Government securities to higher-
yielding loans to small businesses and (ii) portfolio growth from the proceeds
of borrowing arrangements and the Offering. The average invested assets in
loans to small businesses increased by $23.6 million (46%), from $51.1 million
during the three months ended September 30, 1995, to $74.7 million during the
three months ended September 30, 1996. The annualized average yields on loans
for the three months ended September 30, 1996 and 1995 were approximately 12.4%
and 12.0%, respectively. Interest income - loans includes interest earned on
loans, the accretion of a discount on purchased loans (approximately $7,500 and
$6,700 during the three months ended September 30, 1996 and 1995, respectively)
and the accretion of deferred commitment fees (approximately $76,000 and
$33,000 during the three months ended September 30, 1996 and 1995,
respectively).
Interest and dividends - other investments increased by $558,000 from
$7,000 during the three months ended September 30, 1995, to $565,000 during the
three months ended September 30, 1996. This increase was due to an increase in
funds available for short-term investments which resulted from the completion
of the structured financing in March 1996, and from the completion of the
Offering in July 1996. The average short-term investments of the Company
increased by $41.8 million, from $779,000 during the three months ended
September 30, 1995, to $42.6 million during the three months ended September
30, 1996. The average yields on short-term investments during the three months
ended September 30, 1996 and 1995 were approximately 5.3% and 3.7%,
respectively.
Other income increased by $123,000 (192%), from $64,000 during the three
months ended September 30, 1995, to $187,000 during the three months ended
September 30, 1996. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment penalties, (iii) late and other loan fees and
(iv) miscellaneous collections. The increase was primarily due to the
collection of prepayment penalties during the three months ended September 30,
1996 of $72,000. Additionally, income recognized from other loan-related fees,
such as assumption, modification and extension fees, increased by $55,000 from
$14,000 during the three months ended September 30, 1995, to $69,000
12
15
during the three months ended September 30, 1996. These increases were offset
by income recognized from the monitoring of hospitality construction projects
in process which decreased by $11,000 from $50,000 during the three months
ended September 30, 1995, to $39,000 during the three months ended September
30, 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 PMC
Commercial's officers (other than stock options) and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses paid by the Company include direct transaction costs incident to
the acquisition and disposition of investments, regular legal and auditing fees
and expenses, the fees and expenses of PMC Commercial's independent trust
managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of the Company's custodian and transfer agent. The
Company, rather than the Investment Manager, is also required to pay expenses
associated with any litigation and other extraordinary or nonrecurring
expenses. Pursuant to the Investment Management Agreement, the Company
incurred an aggregate of $520,000 in management fees for the three months ended
September 30, 1996, $251,000 of which were incurred as a cost of the Offering.
Of the total management fees paid or payable to the Investment Manager during
the three months ended September 30, 1996, $76,000 has been offset against
commitment fees as a direct cost of originating loans and the $251,000
described above has been offset against additional paid-in capital. Investment
management fees were $316,000 for the three months ended September 30, 1995.
Of the total management fees paid or payable to the Investment Manager during
the three months ended September 30, 1995, $35,000 was offset against
commitment fees as a direct cost of originating loans. The increase in
investment management fees of $204,000 (prior to offsetting direct costs
related to the origination of loans and the issuance of the Company's common
shares), or 65%, is primarily due to consulting fees incurred for the placement
of common shares of $251,000. This increase was offset by a decrease in the
Base Fee calculated pursuant to the Investment Management Agreement. The
average quarterly invested assets increased by $24.2 million or 47% from $51.2
million during the quarter ended September 30, 1995 to $75.4 million during the
quarter ended September 30, 1996, and average quarterly common equity capital
increased by $3 million, or 6% from $47.8 million during the quarter ended
September 30, 1995 to $50.8 million during the quarter ended September 30,
1996.
Legal and accounting fees increased by $5,000 (56%), from $9,000 during
the three months ended September 30, 1995, to $14,000 during the three months
ended September 30, 1996. This increase is attributable to billing of
accounting and corporate legal fees during the three months ended September 30,
1996.
General and administrative expenses increased by $15,000 (65%), from
$23,000 during the three months ended September 30, 1995, to $38,000 during
the three months ended September 30, 1996. This increase is primarily
attributable to an increase in costs related to printing expenses and the
Company's structured financing and revolving credit facility during the three
months ended September 30, 1996.
13
16
Interest expense of $516,000 relates primarily to interest on the
structured financing (approximately $488,000), the amortization of deferred
borrowing costs (approximately $23,000), and interest incurred on borrower
advances (approximately $5,000) during the three months ended September 30,
1996. The obligation to pay interest on borrower advances is included in
borrower advances on the accompanying consolidated balance sheets. During the
three months ended September 30, 1995, the Company incurred interest expense on
its revolving credit facility of $16,000 and interest on borrower advances of
$9,000.
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements
for Federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of 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.
In general, to meet its liquidity requirements, including expansion of
its outstanding loan portfolio, the Company, after utilization of any available
working capital, may use: (i) its short-term credit facility as described
below, (ii) placement of long-term borrowings, (iii) issuance of debt
securities and/or (iv) offerings of additional equity securities, including
preferred shares of beneficial interest (the "Preferred Shares"). Pursuant to
the Investment Management Agreement, if the Company does not have available
capital to fund outstanding commitments, the Investment Manager will refer such
commitments to PMC Capital, Inc., an affiliate of the Company, or to one or
more of PMC Capital's subsidiaries.
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 September 30, 1996, the Company
had no outstanding borrowings under the revolving credit facility and an
availability of $20 million. The Company is charged interest on the balance
outstanding, if any, under the revolving 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.
During March 1996, the Company, through a limited partnership structure,
completed a private placement of approximately $29.5 million of notes issued
pursuant to a rated structured financing collateralized by a portion of the
Company's commercial loan portfolio (the "Private Placement"). The financing
resulted in net proceeds to the Company of approximately $27.1 million, of
which approximately $10.3 million were used to repay outstanding borrowings
under the Company's revolving credit facility. During July 1996, the Company
completed the sale of 2,335,000 of its Common Shares in the Offering, resulting
in net proceeds to the Company of $34.5 million.
14
17
As a result of the proceeds from the Private Placement and the Offering,
the Company had $36.1 million of cash and cash equivalents at September 30,
1996. In addition, funds will be available to the Company from the proceeds of
the dividend reinvestment plan and amounts received from the repayment of loans
advanced pursuant to the SBA 504 program. At September 30, 1996, the Company
had approximately $46 million in outstanding commitments to originate loans.
To the extent the Company has available funds, an additional $5.1 million in
commitments made by the Investment Manager were designated for the Company at
September 30, 1996. It is anticipated that these loans will be funded by the
Company. Such commitments are made in the ordinary course of the Company's
business and 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 amount does not necessarily represent future cash requirements.
Loan demand has remained strong. The Private Placement and the Offering
have provided the Company with sufficient funds to expand the outstanding
portfolio consistent with historical growth levels. After utilization of
these funds and until such time as additional long-term financing is available,
the Company will continue to borrow funds based on a variable rate of interest
by utilizing its revolving credit facility, and originating loans with a fixed-
rate of interest. Net income on these leveraged funds will be materially
dependent on the spread between the rate at which it borrows funds and the rate
at which it loans these funds.
Management anticipates that (i) available short-term investments, (ii)
availability under the revolving credit facility and (iii) proceeds from the
dividend reinvestment plan and the SBA 504 loan program, will be adequate to
meet its existing obligations.
RISKS ASSOCIATED WITH LEVERAGE
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 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.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED ON THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The forward-
looking statements included herein are based on current expectations that
involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or
15
18
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-Q will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
16
19
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Investment Management Agreement between the Company
and PMC Advisers, Inc., dated July 1, 1996.
27 Financial Data Schedule
B. Forms 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
17
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Commercial Trust
Date: 11/14/96 /s/ Lance B. Rosemore
---------- ---------------------------------------
Lance B. Rosemore
President
Date: 11/14/96 /s/ Barry N. Berlin
---------- ---------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
18
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Investment Management Agreement between the Company and PMC
Advisers, Inc., dated July 1, 1996.
27 Financial Data Schedule