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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 March 31, 1998
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) 349-3200
- ----------------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ------
As of May 1, 1998, Registrant had outstanding 6,509,231 Common Shares of
Beneficial Interest, par value $.01 per share.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
INDEX
PART I. Financial Information
PAGE NO.
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Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
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PART I
Financial Information
ITEM 1.
Financial Statements
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
INVESTMENTS:
Loans receivable, net ........................................ $ 113,213 $ 109,132
Cash equivalents ............................................. 283 32
Restricted investments ....................................... 1,507 5,766
--------- ---------
TOTAL INVESTMENTS .............................................. 115,003 114,930
--------- ---------
OTHER ASSETS:
Cash ......................................................... 466 4
Interest receivable .......................................... 683 654
Deferred borrowing costs, net ................................ 206 280
Other assets, net ............................................ 43 9
--------- ---------
TOTAL OTHER ASSETS ............................................. 1,398 947
--------- ---------
TOTAL ASSETS ................................................... $ 116,401 $ 115,877
========= =========
LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Notes payable ................................................ $ 16,754 $ 18,721
Borrower advances ............................................ 1,511 1,431
Dividends payable ............................................ 2,830 2,749
Unearned commitment fees ..................................... 838 948
Due to affiliates ............................................ 774 344
Unearned construction monitoring fees ........................ 56 67
Interest payable ............................................. 154 182
Other liabilities ............................................ 220 193
--------- ---------
TOTAL LIABILITIES .............................................. 23,137 24,635
--------- ---------
Commitments and contingencies
BENEFICIARIES' EQUITY:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,506,600 and
6,392,518 shares issued and outstanding at March 31, 1998
and December 31, 1997, respectively ..................... 65 64
Additional paid-in capital ................................... 93,883 91,687
Cumulative net income ........................................ 28,332 25,677
Cumulative dividends ......................................... (29,016) (26,186)
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Total beneficiaries' equity .................................... 93,264 91,242
--------- ---------
TOTAL LIABILITIES AND BENEFICIARIES' EQUITY .................... $ 116,401 $ 115,877
========= =========
Net asset value per share ...................................... $ 14.31 $ 14.27
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
Three Months Ended March 31,
-=---------------------------
1998 1997
------------ ------------
(Unaudited)
REVENUES:
Interest income - loans ...................... $ 3,083 $ 2,777
Interest and dividends - other investments ... 65 287
Other income ................................. 356 100
------------ ------------
TOTAL REVENUES ................................. 3,504 3,164
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EXPENSES:
Interest ..................................... 405 444
Advisory and servicing fees to affiliate, net. 381 331
General and administrative ................... 32 31
Provision for loan losses .................... 10 20
Legal and accounting fees .................... 21 14
------------ ------------
TOTAL EXPENSES ................................. 849 840
------------ ------------
NET INCOME ..................................... $ 2,655 $ 2,324
============ ============
Weighted average shares outstanding ............ 6,454,344 6,127,042
============ ============
Basic and diluted earnings per share ........... $ 0.41 $ 0.38
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
--------------------------
1998 1997
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net income ............................................... $ 2,655 $ 2,324
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount and fees ....................... (138) (153)
Amortization of organization and borrowing costs ..... 76 13
Provision for loan losses ............................ 10 20
Commitment fees collected, net ....................... 203 285
Construction monitoring fees collected, net .......... 15 28
Changes in operating assets and liabilities:
Accrued interest receivable ...................... (28) 32
Other assets ..................................... (36) (23)
Interest payable ................................. (28) (1)
Borrower advances ................................ 80 (587)
Due to affiliates ................................ 430 (255)
Other liabilities ................................ 26 (25)
---------- ----------
Net cash provided by operating activities .................. 3,265 1,658
---------- ----------
Cash flows from investing activities:
Loans funded ............................................. (9,437) (13,955)
Principal collected ...................................... 5,145 1,544
Release of (investment in) restricted investments, net ... 4,259 (438)
---------- ----------
Net cash used in investing activities ...................... (33) (12,849)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common shares ................. 2,072 1,250
Payment of dividends .................................... (2,624) (2,388)
Payment of principal on notes payable ................... (1,967) (240)
---------- ----------
Net cash used in financing activities ...................... (2,519) (1,378)
---------- ----------
Net increase (decrease) in cash and cash equivalents ....... 713 (12,569)
Cash and cash equivalents, beginning of period ............. 36 25,984
---------- ----------
Cash and cash equivalents, end of period ................... $ 749 $ 13,415
========== ==========
Supplemental disclosures:
Dividends reinvested .................................... $ 125 $ 107
========== ==========
Dividends declared, not paid ............................ $ 2,830 $ 2,466
========== ==========
Interest paid ........................................... $ 358 $ 450
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet of PMC Commercial Trust
("PMC Commercial") and its subsidiaries (collectively the "Company") as of
March 31, 1998 and the consolidated statements of income and cash flows for the
three months ended March 31, 1998 and 1997 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 March 31, 1998, and the results of operations and cash
flows for the three months ended March 31, 1998 and 1997. 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 1997 Annual
Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The results for the three months ended March 31, 1998 are not
necessarily indicative of future financial results.
NOTE 2. BASIS FOR CONSOLIDATION
During 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 January 1998, the Company paid $0.430 per share in dividends to
common shareholders of record on December 31, 1997. During March 1998, the
Company declared a $0.435 per share dividend to common shareholders of record
on March 31, 1998 which was paid on April 13, 1998.
NOTE 4. DUE TO AFFILIATES
Pursuant to an investment management agreement (the "Investment Management
Agreement") between the Company and PMC Advisers, Ltd., an affiliated entity
(the "Investment Manager"), the Company incurred fees of approximately
$422,000 for the three months ended March 31, 1998. Of the servicing and
advisory fees incurred under the Investment Management Agreement during the
three months ended March 31, 1998, $41,000 has been offset against commitment
fees as a direct cost of originating loans.
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 day period subsequent to such offering.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE
During 1996, the Partnership, a special purpose affiliate of PMC
Commercial, completed a private placement (the "Private Placement") of $29.5
million of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "Notes"). The
Notes (i) have a present balance outstanding of $12.9 million, (ii) mature in
2016, (iii) bear interest at the rate of 6.72% per annum and (iv) are
collateralized by loans contributed by PMC Commercial to the Partnership, which
loans have an aggregate of approximately $23.0 million of principal
outstanding at March 31, 1998.
NOTE 6. NET INCOME PER SHARE:
The weighted average number of common shares of beneficial interest
outstanding were 6,454,344 and 6,127,042 for the three months ended March 31,
1998 and 1997, respectively. For purposes of calculating diluted earnings per
share, the weighted average shares outstanding were increased by 8,011 and
6,976 for the effect of stock options during the three months ended March 31,
1998 and 1997, respectively.
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. As the Company does
not have any components of comprehensive income not currently included in the
consolidated statements of income, SFAS No. 130 has no impact on the Company.
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. The
requirements of SFAS No. 131 are not required in interim financial statements
in the initial year of adoption.
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PART I
FINANCIAL INFORMATION
ITEM 2 .
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was organized in June 1993 and had no operations prior to
completion of its initial public offering (the "IPO") on December 28, 1993.
During the three months ended March 31, 1998 and the years ended December 31,
1997, 1996 and 1995, the Company originated and funded $9.4 million, $43.1
million, $40.4 million and $31.7 million of loans. A substantial portion of
such loan originations were to corporations and individuals in the lodging
industry.
As of March 31, 1998 and December 31, 1997, the total portfolio
outstanding was $115.1 million and $110.8 million, respectively, ($113.2
million and $109.1 million, respectively, after reductions for loans purchased
at a discount and deferred commitment fees) with a weighted average contractual
interest rate of approximately 10.8%. 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 three months ended
March 31, 1998 and the years ended December 31, 1997, 1996 and 1995 were
approximately 12.5%, 12.4%, 12.1% and 12.1%, respectively. Generally, these
loans are collateralized by first liens on real estate and guaranteed by the
principals of the businesses financed. Included in principal outstanding at
March 31, 1998 are $2.5 million of interim financing which have been advanced
pursuant to the SBA's section 504 lending program. Interest rates charged on
such advances are comparable to those which are customarily charged by the
Company.
As of March 31, 1998, the Company had two loans which were greater than
30 days delinquent. The aggregate principal balance outstanding of the
delinquent loans was approximately $1.8 million (1.6%) of the total outstanding
principal balance of the loan portfolio). One of the two loans (with a
principal balance outstanding at March 31, 1998 of approximately $1.0 million)
has subsequently been brought current and continues to be current as of the
date of the filing of this Form 10-Q. The second loan continues to be
significantly delinquent. As of March 31, 1998, the Company has established a
reserve in the amount of $70,000 against such loan. In management's opinion,
the realized value upon liquidation of the collateral relating to this loan
will equal or exceed the principal balance outstanding on the loan less the
related reserve.
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 at the time of
determination, will be equal to the product of the amount of the related
Principal Prepayment and the percentage Prepayment Charge applicable to
Principal Prepayments on such Loan at such time of determination.
Prepayment Charges vary by loan and generally are based on 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
three months ended March 31, 1998 and the year ended December 31, 1997, the
Company received $3.1 million and $18.3 million in principal prepayments as
compared to $400,000 and $2.2 million during the three months ended March 31,
1997 and the year ended December 31, 1996, respectively. As a result of 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
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reloaned at lower rates than the prepaid loans. The impact of the lower
lending rates is partially offset (based on current market conditions) by the
reduced cost of the Company's borrowings. See"Interest Rate and Prepayment
Risk".
INTEREST RATE AND PREPAYMENT RISK
The ability of the Company to achieve certain of its investment
objectives will depend in part on its ability to continue to borrow funds or
issue preferred shares of beneficial interest on favorable terms, and there can
be no assurance that such borrowings or issuances can in fact be achieved. The
Company's net income is materially dependent upon the "spread" between the rate
at which it borrows funds (typically either short-term at variable rates or
long-term at fixed rates) and the rate at which it loans these funds
(typically long-term at fixed rates). During periods of changing interest
rates, interest rate mismatches could negatively impact the Company's net
income and dividend yield and, as a result, the market price of the Company's
common shares of beneficial interest. As interest rates have declined, the
Company has experienced significant prepayments. As a result of the declining
interest rate environment such prepayments, as well as scheduled repayments,
have been reloaned at lower rates, which has an adverse effect on the Company's
results of operations and may have an impact on its ability to maintain
distributions at historic levels. The loans originated by the Company have
prepayment fees charged ("make whole provisions") which the Company believes
helps mitigate the likelihood and effect of Principal Prepayments. See
"Prepayment Considerations".
CERTAIN ACCOUNTING CONSIDERATIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company follows the accounting practices prescribed by the American
Institute of Certified Public Accountants - Accounting Standards Division in
Statement of Position 75-2 "Accounting Practices of Real Estate Investment
Trusts" ("SOP 75-2"). In accordance with SOP 75-2, a loan loss reserve is
established based on a determination, through an evaluation of the
recoverability of individual loans, by the Board of Trust Managers that
significant doubt exists as to the ultimate realization of the loan. To date,
a $70,000 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 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 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
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
The net income of the Company during the three months ended March 31,
1998 and 1997, was $2,655,000 and $2,324,000, or $0.41 and $0.38 per share,
respectively. The weighted average shares outstanding increased by
approximately 5% from 6,127,042 for the three months ended March 31, 1997 to
6,454,344 for the three months ended March 31, 1998 as a result of shares
issued pursuant to the dividend reinvestment and cash purchase plan.
Interest income - loans increased by $306,000 (11%), from $2,777,000
during the three months ended March 31, 1997, to $3,083,000 during the three
months ended March 31, 1998. This increase was primarily attributable to the
reallocation of the Company's initial investment of the proceeds from the
Private Placement in March 1996 and the Offering in July 1996 from cash and
government securities to higher-yielding loans to small businesses. The
average invested assets in loans to small businesses increased by $14.0 million
(14%), from $98.0 million during the three months ended March 31, 1997, to
$112.0 million during the three months ended March 31, 1998. The annualized
average yields on loans, including all loan fees earned, for the three months
ended March 31, 1998 and 1997 were approximately 12.5% and 11.5%, respectively.
Interest income - loans includes interest earned on loans, the accretion of
discounts on purchased loans and the accretion of deferred commitment fees.
Interest and dividends - other investments decreased by $222,000 (77%)
from $287,000 during the three months ended March 31, 1997, to $65,000 during
the three months ended March 31, 1998. This decrease was due to
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the utilization of the funds which were available for short-term investments
(during the three months ended March 31, 1997) resulting from the Private
Placement in March 1996 and the Offering in July 1996, to originate loans. As
of December 31, 1997 the Company had fully utilized its working capital and was
borrowing under the Revolver to provide working capital. Accordingly, short-
term investments during the three months ended March 31, 1998 were
significantly reduced. The average short-term investments of the Company
decreased by $18.9 million, from $22.0 million during the three months ended
March 31, 1997, to $3.1 million during the three months ended March 31, 1998.
The average yields on short-term investments during the three months ended
March 31, 1998 and 1997 were approximately 4.9% and 5.2%, respectively.
Other income increased by $256,000 (256%), from $100,000 during the
three months ended March 31, 1997, to $356,000 during the three months ended
March 31, 1998. Other income consists of: (i) amortization of construction
monitoring fees, (ii) prepayment fees, (iii) late and other loan fees and (iv)
miscellaneous collections. The increase was principally attributable to the
collection of prepayment fees during the three months ended March 31, 1998 of
$252,000 compared to $17,000 during the three months ended March 31, 1997.
Additionally; (i) income recognized from other loan-related fees, such as
assumption, modification and extension fees, increased by $55,000 from $23,000
during the three months ended March 31, 1997, to $78,000 during the three
months ended March 31, 1998, and (ii) income recognized from the monitoring of
hospitality construction projects in process decreased by $35,000 from $61,000
during the three months ended March 31, 1997, to $26,000 during the three
months ended March 31, 1998.
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, 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 $422,000 in management fees for the three months ended
March 31, 1998. Of the total management fees paid or payable to the Investment
Manager during the three months ended March 31, 1998, $41,000 has been offset
against commitment fees as a direct cost of originating loans. Investment
management fees were $386,000 for the three months ended March 31, 1997. Of
the total management fees paid or payable to the Investment Manager during the
three months ended March 31, 1997, $55,000 was offset against commitment fees
as a direct cost of originating loans. The increase in investment management
fees of $36,000 (prior to offsetting direct costs related to the origination of
loans), or 9%, is primarily due to the average quarterly value of all invested
assets (as defined by the amended Investment Management Agreement) increasing
from $98.1 million during the three months ended March 31, 1997, to $112.9
million during the three months ended March 31, 1998 a $14.8 million, or 15%,
increase), and the average quarterly value of common equity capital (as
defined by the amended Investment Management Agreement) increasing from $86.7
million during the three months ended March 31, 1997, to $92.8 million during
the three months ended March 31, 1998 (a $6.1 million, or 7%, increase).
Legal and accounting fees increased by $7,000 (50%), from $14,000 during
the three months ended March 31, 1997, to $21,000 during the three months ended
March 31, 1998. This increase is attributable to an increase in corporate
activity when comparing the three months ended March 31, 1998 to the three
months ended March 31, 1997.
General and administrative expenses increased by $1,000 (3%), from
$31,000 during the three months ended March 31, 1997, to $32,000 during the
three months ended March 31, 1998. The general and administrative expenses
remained at low levels and stable since the majority of the expenses are
encompassed by the Investment Management Agreement.
Interest expense during the three months ended March 31, 1998 relates
primarily to interest incurred on the
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Private Placement completed in March 1996 (approximately $334,000), interest on
the revolving credit facility (approximately $62,000) and interest incurred on
borrower advances (approximately $9,000). During the three months ended March
31, 1997, interest expense relates primarily to interest incurred on the
Private Placement (approximately $445,000) and interest incurred on borrower
advances (approximately $25,000).
As the Company is currently qualified as a real estate investment trust
under the applicable provisions of the Internal Revenue Code of 1986, as
amended, there are no provisions in the financial statements for Federal
income taxes.
CASH FLOW ANALYSIS
The Company generated $3,265,000 and $1,658,000 from operating
activities during the three months ended March 31, 1998 and 1997, respectively.
The increase of $1,607,000 (97%) was primarily due to fluctuations in borrower
advances which increased by $667,000 from a use of $587,000 during the three
months ended March 31, 1997, to a source of $80,000 during the three months
ended March 31, 1998, an increase in net income from $2,324,000 during the
three months ended March 31, 1997 to $2,655,000 during the three months ended
March 31 1998, and the change related to "due to affiliates" which increased by
$685,000 from a use of $255,000 during the three months ended March 31,1997, to
a source of $430,000 during the three months ended March 31, 1998.
The Company used $33,000 and $12,849,000 through investing activities
during the three months ended March 31, 1998 and 1997, respectively. The
decreased use of funds of $12,816,000 was due to; (i) a decrease of $4,518,000
in loans funded during the three months ended March 31, 1998 compared to the
three months ended March 31, 1997, (ii) an increase in principal collected on
loans of $3,601,000 (primarily due to loan prepayments) during the three months
ended March 31, 1998 compared to the three months ended March 31, 1997 and
(iii)an increase in the source of funds provided by restricted investments at
December 31, 1997 used in January 1998 to reduce the note payable related to
the structured financing.
The Company used $2,519,000 and $1,378,000 from financing activities
during the three months ended March 31, 1998 and 1997, respectively. During
the three months ended March 31, 1998 and 1997, the main source of funds was
$2,072,000 and $1,250,000, respectively, in proceeds received from issuance of
common stock pursuant to the dividend reinvestment and cash purchase plan. The
Company's main use of funds from financing activities are the payment of
dividends as part of its requirements to maintain REIT status and the payment
of principal on notes payable. Dividends paid increased $236,000 from
$2,388,000 during the three months ended March 31, 1997, to $2,624,000 during
the three months ended March 31, 1998. This increase corresponds to the
Company's increase in net income. Payment of principal on notes payable
increased $1,727,000 from $240,000 during the three months ended March 31,
1997, to $1,967,000 during the three months ended March 31, 1998 as a result of
increased principal prepayments on the loans receivable collateralizing the
notes payable.
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 March 31, 1998, the Company had $749,000 of cash and cash
equivalents and approximately $33.6 million of total loan commitments
outstanding to 37 small business concerns predominantly in the lodging
industry. The weighted average interest rate on these loan commitments at March
31, 1998 was 10.0%. Of those commitments, approximately $7.5 million related
to 18 partially funded construction loans. Approximately $2.9 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
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Company intends to use: (i) its short-term credit facility as described below,
(ii) placement of long-term borrowings, (iii) issuance of debt securities,
and/or (iv) offering of additional equity securities, including preferred
shares of beneficial interest (the "Preferred Shares). The Company has a
dividend reinvestment and cash purchase plan ("DRP") available to its
shareholders (see Note 9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997). 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 to amend the calculation of the purchase price of the shares
issued related to open market purchases under the plan are being reviewed.
Pursuant to the Investment Management Agreement, if the Company does not
have available capital to fund outstanding commitments, the Investment Manager
will refer such commitments to affiliates of the Company with respect to which
the Company will receive no fees. The ability of the Company to meet its
liquidity needs will depend on its ability to borrow funds or issue equity
securities on favorable terms.
By December 31, 1995, the Company had fully utilized the proceeds from
its IPO. During 1995, the Company completed an arrangement for a revolving
credit facility (the "Revolver") 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. In addition,
pursuant to an amendment to the Company's Revolver, the bank has extended an
additional $12.5 million through an uncommitted credit facility (the "Guidance
Line') available at the discretion of the bank. At March 31, 1998, the Company
had $3.8 million outstanding borrowings under the credit facility and $16.2
million available thereunder ($28.7 million available including amounts under
the Guidance Line). 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 175 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. The Company has commenced a structured
financing similar to the Private Placement completed in 1996, proceeds are
anticipated to be between $45 million to $60 million. It is anticipated that
this transaction will be completed during the second or third quarter of 1998.
There can be no assurance the Company will be able to complete the contemplated
structured financing or raise funds through the other identified financing
sources. If these sources are not available, the Company will be required to
fully utilize its $20 million revolving credit facility and $12.5 million
Guidance Line, increase its revolving credit facility and/or may have to slow
the rate of increasing the outstanding loan portfolio.
During 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 Partnership's 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 " Prepayment Consideration" and "Interest Rate and
Prepayment Risks".
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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. As the Company does
not have any components of comprehensive income not currently included in the
consolidated statements of income, SFAS No. 130 has no impact on the Company.
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. The
requirements of SFAS No. 131 are not required in interim financial statements
in the initial year of adoption.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED ON THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The forward-
looking statements included herein are based on current expectations that
involve numerous risks and uncertainties and, in most instances, are identified
through the use of words such as "anticipates," "expects" and "should."
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Third Amended and Restated Revolving Credit Note
dated as of March 15, 1998.
10.2 Third Amendment to Loan Agreement and Amendment to
Loan Documents and Renewal and Extension of Loan
Dated as of March 15, 1998.
27.1 Financial Data Schedule
B. Forms 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
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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: 05/14/98 \s\ Lance B. Rosemore
--------------------------- ---------------------------------
Lance B. Rosemore
President
Date: 05/14/98 \s\ Barry N. Berlin
--------------------------- ---------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Third Amended and Restated Revolving Credit Note dated as of March 15, 1998.
10.2 Third Amendment to Loan Agreement and Amendment to Loan Documents and
Renewal and Extension of Loan Dated as of March 15, 1998.
27.1 Financial Data Schedule