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FORM 10 - Q/A
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, 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 1-13610
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PMC COMMERCIAL TRUST
(Exact name of registrant as specified in its charter)
TEXAS 75-6446078
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
18111 Preston Road, Suite 600,
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 November 1, 1998, Registrant had outstanding 6,515,780 Common Shares of
Beneficial Interest, par value $.01 per share.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 3
Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
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PART I
Financial Information
ITEM 1.
Financial Statements
1
4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
INVESTMENTS:
Loans receivable, net ................................................... $ 125,288 $ 109,132
Cash equivalents ........................................................ 107 32
Restricted investments .................................................. 7,312 5,766
--------- ---------
TOTAL INVESTMENTS ......................................................... 132,707 114,930
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET ........................................ 62,242 --
--------- ---------
OTHER ASSETS:
Cash .................................................................... 18 4
Interest receivable ..................................................... 787 654
Deferred borrowing costs, net ........................................... 744 280
Other assets, net (note 11) ............................................. 849 9
--------- ---------
TOTAL OTHER ASSETS ........................................................ 2,398 947
--------- ---------
TOTAL ASSETS .............................................................. $ 197,347 $ 115,877
========= =========
LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Notes payable ........................................................... $ 95,216 $ 18,721
Borrower advances ....................................................... 2,215 1,431
Dividends payable ....................................................... 2,931 2,749
Unearned commitment fees ................................................ 648 948
Due to affiliates ....................................................... 608 344
Interest payable ........................................................ 466 182
Other liabilities ....................................................... 1,766 260
--------- ---------
TOTAL LIABILITIES ......................................................... 103,850 24,635
--------- ---------
Commitments and contingencies
BENEFICIARIES' EQUITY:
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01
par value; 6,512,055 and 6,392,518 shares issued and outstanding at
September 30, 1998
and December 31, 1997, respectively ................................ 65 64
Additional paid-in capital .............................................. 93,989 91,687
Cumulative net income ................................................... 34,255 25,677
Cumulative dividends .................................................... (34,812) (26,186)
--------- ---------
Total beneficiaries' equity ............................................... 93,497 91,242
--------- ---------
TOTAL LIABILITIES AND BENEFICIARIES' EQUITY ............................... $ 197,347 $ 115,877
========= =========
Net asset value per share ................................................. $ 14.36 $ 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 per share data)
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- --------------
(Unaudited)
Revenues:
Interest income - loans ............................. $10,021 $ 9,126
Lease income ........................................ 1,678 --
Interest and dividends - other investments .......... 224 603
Other income ........................................ 1,206 593
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TOTAL REVENUES ........................................ 13,129 10,322
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EXPENSES:
Interest ............................................ 2,555 1,295
Advisory and servicing fees to affiliate, net ....... 1,276 1,073
General and administrative .......................... 150 114
Depreciation and amortization ....................... 488 --
Provision for loan losses ........................... 30 50
Legal and accounting fees ........................... 52 38
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TOTAL EXPENSES ........................................ 4,551 2,570
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NET INCOME ............................................ $ 8,578 $ 7,752
======= =======
Weighted average shares outstanding ................... 6,492 6,204
======= =======
Basic and diluted earnings per share .................. $ 1.32 $ 1.25
======= =======
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 per share data)
Three Months Ended September 30,
--------------------------------
1998 1997
------------ ---------------
(Unaudited)
REVENUES:
Interest income - loans ............................. $3,578 $3,126
Lease income ........................................ 1,661 --
Interest and dividends - other investments .......... 85 144
Other income ........................................ 628 155
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TOTAL REVENUES ........................................ 5,952 3,425
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EXPENSES:
Interest ............................................ 1,656 397
Advisory and servicing fees to affiliate, net ....... 526 373
General and administrative .......................... 49 37
Depreciation and amortization ....................... 488 --
Provision for loan losses ........................... 10 10
Legal and accounting fees ........................... 8 --
------ ------
TOTAL EXPENSES ........................................ 2,737 817
------ ------
NET INCOME ............................................ $3,215 $2,608
====== ======
Weighted average shares outstanding ................... 6,512 6,275
====== ======
Basic and diluted earnings per share .................. $ 0.49 $ 0.42
====== ======
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)
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 8,578 $ 7,752
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 488 --
Accretion of discount and fees ............................ (488) (651)
Amortization of organization and borrowing costs .......... 166 40
Provision for loan losses ................................. 30 50
Commitment fees collected, net ............................ 366 495
Construction monitoring fees collected, net ............... 34 53
Changes in operating assets and liabilities:
Accrued interest receivable ........................... (133) (76)
Other assets .......................................... (846) (44)
Interest payable ...................................... 284 (37)
Borrower advances ..................................... 784 (569)
Due to affiliates ..................................... 263 (285)
Other liabilities ..................................... 1,533 23
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 11,059 6,751
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded .................................................. (34,125) (35,878)
Principal collected ........................................... 17,700 18,466
Purchase of property, plant and equipment ..................... (62,730) --
Investment in restricted investments, net ..................... (1,546) (1,232)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................... (80,701) (18,644)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ...................... 2,072 3,386
Proceeds from issuance of notes payable ...................... 117,735 --
Payment of dividends ......................................... (8,212) (7,165)
Payment of principal on notes payable ........................ (41,240) (6,554)
Payment of issuance costs .................................... (624) (16)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............. 69,731 (10,349)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 89 (22,242)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 36 25,984
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 125 $ 3,742
========= ========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested ......................................... $ 231 $ 352
========= ========
Dividends declared, not paid ................................. $ 2,931 $ 2,647
========= ========
Interest paid ................................................ $ 2,679 $ 1,286
========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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PART I
Financial Information
ITEM 1.
Financial Statements
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet of PMC Commercial Trust
("PMC Commercial") and its subsidiaries (collectively, with PMC Commercial, the
"Company") as of September 30, 1998 and the consolidated statements of income
for the three and nine months ended September 30, 1998 and 1997 and the
consolidated statements of cash flows for the nine months ended September 30,
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 September 30,
1998, and the results of operations for the three and nine months ended
September 30, 1998 and 1997 and the cash flows for the nine months ended
September 30, 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 and nine months ended September 30, 1998 are
not necessarily indicative of future financial results.
NOTE 2. RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
current year presentation.
NOTE 3. BASIS FOR CONSOLIDATION
During 1996, PMC Commercial Receivable Limited Partnership, a Delaware
limited partnership ("PCR" or the "1996 Partnership"), and PMC Commercial Corp.,
a Delaware corporation, were formed. PMC Commercial Corp. is the general partner
for PCR. During 1998, PMC Commercial Trust, Ltd. 1998-1 ("PMCT98" or the "1998
Partnership"), and PMCT Corp. 1998-1, a Delaware corporation were formed. PMCT
Corp. 1998-1 is the general partner for PMC Commercial Trust, Ltd. 1998-1. The
consolidated financial statements include the accounts of PMC Commercial, PMC
Commercial Corp., PCR, PMCT98 and PMCT Corp. 1998-1.
PMC Commercial directly or indirectly owns 100% of PMC Commercial
Corp., the 1996 Partnership, PMCT Corp. 1998-1, and the 1998 Partnership (See
Note 6).
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
provided on the straight-line method based upon the estimated useful lives of
the assets and estimated residual values. The buildings and improvements are
being depreciated utilizing a 35 year useful life and the furniture, fixtures
and equipment are being depreciated over a seven year useful life. Maintenance
and repairs are the responsibility of the lessee and are charged to the lessee's
operations as incurred; major replacements, renewals and improvements are
capitalized.
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
The Company periodically reviews the carrying value of each hotel
property in accordance with Statement of Financial Accounting Standards (`SFAS")
No. 121 to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel property or that depreciation
periods should be modified. If facts or circumstances support the possibility of
impairment, the Company will prepare a projection of the undiscounted future
cash flows of the specific hotel property and determine if the investment in the
hotel property is recoverable based on the undiscounted future cash flows. If
impairment is indicated, an adjustment will be made to the carrying value of the
hotel property based on the discounted cash flows. The Company does not believe
that there are any current facts or circumstances indicating impairment of any
of its property, plant and equipment. Property, plant and equipment consists of
the following at September 30, 1998:
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS)
Land $ 6,900
Buildings and Improvements 51,105
Furniture, Fixtures and Equipment 4,725
--------
62,730
Accumulated Depreciation (488)
Property, Plant and Equipment, net $ 62,242
NOTE 5. DIVIDENDS TO BENEFICIARIES
In January 1998, the Company paid $0.430 per share in dividends to
common shareholders of record on December 31, 1997. In April 1998, the Company
paid $0.435 per share in dividends to common shareholders of record on March 31,
1998. In July 1998, the Company paid $0.440 per share in dividends to common
shareholders of record on June 30, 1998. In September 1998, the Company declared
a $0.450 per share dividend to common shareholders of record on September 30,
1998 which was paid on October 13, 1998.
NOTE 6. RELATED PARTY TRANSACTIONS
Pursuant to investment management agreements (the "Investment
Management Agreements") between the Company and the investment management
subsidiaries (the "Investment Manager") of PMC Capital, Inc. (an affiliated
entity) the Company incurred fees of approximately $2,078,000 for the nine
months ended September 30, 1998. Of the servicing and advisory fees incurred
under the Investment Management Agreements during the nine months ended
September 30, 1998, $171,000 has been offset against commitment fees as a direct
cost of originating loans, $466,000 has been capitalized as a direct cost of
acquiring property, plant and equipment and $165,000 has been capitalized as a
direct cost of the structured financing completed during the second quarter (See
Note 7).
Pursuant to the amended Investment Management Agreement with the
Investment Manager, fees relating to loan originations and servicing are due
based on the following. 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 6. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the Investment Management Agreement (renewable on an annual
basis) with the Investment Manager relating to property acquisitions by the
Company (the "Property Management Agreement"), the Company will pay certain fees
to the Investment Manager. The Property Management Agreement provides for a one
time fee equal to the product of 0.75% multiplied by the purchase price paid by
the Company to Amerihost Properties, Inc. and its subsidiaries ("Amerihost") in
connection with the purchase of 30 hotels from Amerihost and an annual
management fee equal to the product of 0.70% multiplied by the acquisition cost
of the properties (the "Amerihost Fee"). In the event the Property Management
Agreement with the Investment Manager is terminated or not renewed by the
Company (other than as a result of a material breach by the Investment Manager)
or by the Investment Manager (as a result of a material breach by the Company),
the Investment Manager would be entitled to receive the Amerihost Fee for a
period of five years from the termination date.
NOTE 7. NOTES PAYABLE
During 1996, the 1996 Partnership, a special purpose affiliate of PMC
Commercial, completed a private placement (the "1996 Private Placement") of
$29.5 million of its Fixed Rate Loan Backed Notes, Series 1996-1 (the "1996
Notes"). The 1996 Notes (i) have a present balance outstanding of $10.0 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 1996
Partnership, which loans have an aggregate balance of approximately $20.2
million of principal outstanding at September 30, 1998.
During 1998, the 1998 Partnership, a special purpose affiliate of PMC
Commercial, completed a private placement (the "1998 Private Placement") of
$66.1 million of its Fixed Rate Loan Backed Notes, Series 1998-1 (the "1998
Notes"). The 1998 Notes (i) have a present balance outstanding of $62.9 million,
(ii) mature in 2019, (iii) bear interest at the rate of 6.37% per annum and (iv)
are collateralized by loans contributed by PMC Commercial to the 1998
Partnership, which loans have an aggregate balance of approximately $68.5
million of principal outstanding at September 30, 1998.
As of September 30, 1998, the Company had $22.3 million outstanding
under a revolving credit facility (the "Revolver"). The weighted average
interest rate on such advances under the Revolver was approximately 7.7% at
September 30, 1998.
NOTE 8. NET INCOME PER SHARE
The weighted average number of common shares of beneficial interest
outstanding were 6,492,000 and 6,204,000 for the nine months ended September 30,
1998 and 1997, respectively, and 6,512,000 and 6,275,000 for the three months
ended September 30, 1998 and 1997, respectively. For purposes of calculating
diluted earnings per share, the weighted average shares outstanding were
increased by approximately 3,500 and 15,000 for the effect of stock options for
both the three and nine months ended September 30, 1998 and 1997, respectively.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
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. The
requirements of SFAS No. 131 are not required in interim financial statements in
the initial year of adoption.
Accounting for Contingent Rent in Interim Financial Periods
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9 , "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger
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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
the contingent income are met. In July 1998, the Task Force issued transition
guidance stating that the consensus could be applied on a prospective basis or
in a manner similar to a change in accounting principle effective April 1, 1998.
The Company has reviewed the terms of its leases and has determined that the
provisions of EITF 98-9 will not impact the Company's current revenue
recognition, the Company's annual percentage lease revenue or cash flow from its
third party lessees.
NOTE 10. PROPERTY ACQUISITION
On May 21, 1998, the Company and Amerihost entered into an agreement
pursuant to which the Company would acquire and leaseback 30 hotels (the
"Amerihost Properties"). Pursuant to the sale/leaseback agreement, the Company
would lease the Amerihost Properties to Amerihost Inns, a wholly-owned
subsidiary of Amerihost, for an initial 10 year period, with two renewal options
of five years each. On June 30, 1998, the Company completed the acquisition of
26 of the 30 Amerihost Properties (the "Acquired Properties") for an aggregate
purchase price of $62.2 million. As a result of the Company's acquisition of the
Acquired Properties, the lease has an initial fixed payment of $6.2 million per
year for the first three years with increases allowed up to the lesser of the
consumer price index increase or two percent per year beginning after the third
year. The Company intends to acquire the remaining four Amerihost Properties by
June 1999, subject to certain conditions, and, as a result, the fixed lease
payment would increase to $7.3 million per year. Amerihost guarantees the lease
payment obligation of Amerihost Inns.
The following unaudited condensed pro forma results of operations of
the Company for the nine months ended September 30, 1998 and 1997 were prepared
as if the transaction had occurred on January 1, 1998 and 1997, respectively.
The adjustments to the historical financial statements principally consist of
(i) recognizing lease revenue, (ii) recording depreciation on the Acquired
Properties, (iii) and recording interest expense on the debt related to the
Acquired Properties:
Nine Months Ended
September 30,
--------------------------
1998 1997
-------- --------
Revenues $ 16,422 $ 15,247
Net Income $ 8,656 $ 7,854
Basic and Diluted Earnings Per Share $ 1.33 $ 1.27
NOTE 11. SUBSEQUENT EVENT - CANCELLATION OF PROPOSED MERGER
The Company had entered into an Agreement and Plan of Merger with
Supertel Hospitality, Inc. ("Supertel") pursuant to which Supertel, Hospitality,
Inc. would have merged with and into the Company, subject to the satisfaction of
certain conditions to closing. On October 15, 1998 the Company announced that
the PMC Commercial Board of Trust Managers and the Supertel Hospitality, Inc.
Board of Directors agreed to terminate the merger agreement between the two
companies. In connection with the proposed merger, the Company incurred merger
related costs of approximately $569,000 which is included in Other Assets on the
accompanying balance sheet as of September 30, 1998. These costs (approximately
$0.09 per common share) will be expensed during the fourth quarter of 1998.
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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.
Prior to the Amerihost Transaction (as hereinafter defined), the Company was
solely a commercial lender that originated loans to small business enterprises,
primarily collateralized by first liens on real estate of the related business.
The Company's lending function consists primarily of making loans to borrowers
who operate in the lodging industry. On June 30, 1998, the Company completed the
acquisition of 26 motel properties (the "Acquired Amerihost Properties") from
Amerihost Properties, Inc. and/or its subsidiaries ("Amerihost") for $62.2
million in a sale/leaseback transaction (the "Amerihost Transaction"). The
Company will continue to attempt to enhance shareholder value by increasing its
loan portfolio and making strategic acquisitions of commercial properties.
During the three and nine months ended September 30, 1998 the Company
funded loans of $8.4 and $34.1 million, respectively. 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, respectively. A substantial
portion of such loan originations were to corporations and individuals in the
lodging industry.
As of September 30, 1998 and December 31, 1997, the total portfolio
outstanding was $127.2 million and $110.8 million, respectively ($125.3 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 as of September 30, 1998 of approximately 10.5%. 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
nine months ended September 30, 1998 and the years ended December 31, 1997, 1996
and 1995 were approximately 12.7%, 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 September 30, 1998 are $2.1 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 September 30, 1998, the Company had one loan which was greater
than 30 days delinquent and a second loan which is considered a "problem loan"
since the borrower has lost its franchise affiliation. The aggregate principal
balance outstanding of the delinquent loan was approximately $820,000 and the
"problem loan" was $1,030,000. The delinquent loan was paid in full, including
interest, in October, 1998. As of September 30, 1998, the Company had
established a reserve in the amount of $90,000 against the "problem loan". In
the event such loan is required to be liquidated, management estimates the
collateral relating to the "problem loan" will equal or exceed the principal
balance outstanding on the loan less the related reserve.
The Company believes that favorable opportunities exist for the
acquisition of lodging properties at attractive returns, particularly with
respect to smaller, limited service motels operated under national franchises,
at prices at or below replacement cost. Accordingly, the Company intends to
continue to acquire additional lodging properties or portfolios of lodging
properties thereby deriving revenues from fixed leases and participating in
increased revenue from those properties. As a result, the Company believes it
will be able to continue to accomplish its objective of maximizing cash
available for distributions and enhancing shareholder value.
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The Company concentrates its real estate investment activities on
lodging properties, or portfolios of properties, which meet one or more of the
following criteria:
(i) Properties located in areas with a variety of revenue
generators, such as colleges, recreational areas or interstate
highways.
(ii) Properties with intrinsic values equal to or less than
replacement values.
(iii) Properties which are currently managed by a management group
with a demonstrated ability to pay fixed lease obligations.
(iv) Portfolios of properties which exhibit some or all of the
criteria discussed above, where purchasing several properties
in one transaction enables the Company to obtain a favorable
price or to purchase attractive assets that otherwise would
not be available.
Because the Company is independent of the lessees and operators of its
lodging properties, the Company has flexibility with respect to acquiring and
leasing additional hotels. Due to the current favorable acquisition environment
for lodging properties, the Company intends to continue to pursue acquisitions
in an effort to attain the Company's growth objectives. The Company believes it
is possible to acquire lodging properties with existing or achievable cash flows
to pay the lease obligations needed by the Company to satisfy its investment
criteria.
Because the Company is independent of the lessees and operators of its
lodging properties, the Company has flexibility with respect to acquiring and
leasing additional hotels. Due to the current favorable acquisition environment
for certain types of lodging properties, the Company intends to continue to
pursue acquisitions in an effort to attain the Company's growth objectives. The
Company believes it is possible to acquire lodging properties with existing or
achievable cash flows to pay the lease obligations needed by the Company to
satisfy its investment criteria.
RECENT DEVELOPMENTS
AMERIHOST TRANSACTION. On May 21, 1998, the Company and Amerihost
entered into an agreement pursuant to which the Company would acquire and
leaseback 30 motel properties (the "Amerihost Properties"). Pursuant to the
sale/leaseback agreement, the Company would lease the Amerihost Properties to
Amerihost Inns, a wholly-owned subsidiary of Amerihost, for an initial 10 year
period, with two renewal options of five years each, with consumer price index
increases up to a maximum of two percent per year beginning after the third
year.
On June 30, 1998, the Company completed the acquisition of the 26
Acquired Amerihost Properties for an aggregate purchase price of $62.2 million.
The Acquired Amerihost Properties contain 1,575 rooms. The aggregate amount of
the lease payments for the Acquired Properties is $6.22 million per year. The
Company must consummate the acquisitions of any or all of the remaining four
properties by June 30, 1999. The Company intends to acquire the remaining four
Amerihost Properties, subject to certain conditions, including the assumption of
the debt existing on such four properties, and, as a result, the fixed lease
payment would increase to $7.3 million per year. Amerihost guarantees the lease
payment obligation of Amerihost Inns.
SUMMARIZED FINANCIAL INFORMATION FOR AMERIHOST PROPERTIES, INC.
(DERIVED FROM THE AMERIHOST PUBLIC FILINGS) AS OF SEPTEMBER 30, 1998 AND
DECEMBER 31, 1997 AND 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 IS AS FOLLOWS:
December 31,
September 30, ----------------------
1998 1997 1996
--------- --------- ---------
BALANCE SHEET DATA:
Investment in hotel assets $ 87,764 $ 75,635 $ 49,872
Cash and short-term investments 5,346 2,350 3,029
Total assets 112,212 92,668 66,901
Total debt 91,197 71,075 45,989
Shareholders' equity 21,015 21,593 20,912
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Nine Months
Ended Year Ended December 31,
September 30, ----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
INCOME STATEMENT DATA:
Total revenue $ 52,360 $ 62,666 $ 68,342 $ 51,962
Operating income 3,748 1,980 6,454 4,290
Net income (loss) (415) (966) 3,395 2,138
Amerihost Properties, Inc. is a public entity that files periodic reports with
the SEC. Additional information about Amerihost can be obtained from the SEC's
website at http://www.sec.gov.
The tables show statistical data regarding the 26 Acquired Amerihost
Properties. The four remaining Amerihost Properties which the Company may
acquire are located in: (1) Macomb, Illinois, (2) Sycamore, Illinois, (3)
Plainfield, Indiana and (4) Marysville, Ohio. The hotels in Illinois and Indiana
have 60 rooms each and the Marysville, Ohio hotel has 79 rooms, for a total of
259 additional rooms. The hotel in Jackson, Tennessee was opened in April 1998:
ROOMS IN
CITY STATE HOTEL
---- ----- --------
Anderson California 61
Yreka California 61
Eagles Landing Georgia 60
La Grange Georgia 59
Smyrna Georgia 60
Rochelle Illinois 61
Mt. Pleasant Iowa 63
Storm Lake Iowa 61
Coopersville Michigan 60
Grand Rapids North Michigan 60
Grand Rapids South Michigan 61
Hudsonville Michigan 61
Monroe Michigan 63
Port Huron Michigan 61
Tupelo Mississipi 61
Warrenton Missouri 63
Ashland Ohio 62
Mansfield Ohio 60
Wooster East Ohio 58
Wooster North Ohio 60
Grove City Pennsylvania 61
Shippensburg Pennsylvania 60
Jackson Tennessee 61
McKinney Texas 61
Kimberly Wisconsin 63
Mosinee Wisconsin 53
-----
1,575
=====
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THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
% INCREASE % INCREASE
1998 1997 (1) (DECREASE) 1998 (1) 1997 (1) (DECREASE)
---- -------- ---------- -------- -------- ----------
(UNAUDITED)
Occupancy 67.60% 60.60% 12% 58.80% 55.60% 6%
ADR (2) $ 54.14 $ 54.21 -- $ 52.97 $ 53.11 -
RevPAR (3) $ 36.61 $ 32.85 11% $ 31.16 $ 29.54 5%
(1) The tables show financial and statistical data of the properties
for the periods presented which includes periods prior to June 30,
1998 (the date the Company acquired the properties). Room revenue
was $5,306,000 and $13,221,000 for the three and nine months ended
September 30, 1998, respectively.
(2) "ADR" is defined as the average daily room rate.
(3) "RevPAR" is defined as room revenue per available room and is
determined by dividing room revenue by available rooms for the
applicable period.
SUPERTEL TRANSACTION. On June 3, 1998, the Company entered into an
Agreement and Plan of Merger with Supertel Hospitality, Inc. ("Supertel")
pursuant to which Supertel would have merged with and into the Company, subject
to the satisfaction of certain conditions to closing. On October 15, 1998 the
Company announced that the Company's Board of Trust Managers and the Supertel
Board of Directors agreed to terminate the merger agreement between the two
companies. As part of the proposed merger, the Company had capitalized certain
merger related costs. Other Assets includes approximately $569,000 (or
approximately $.09 per share) which will be written off in the last quarter of
1998.
SECURED FINANCING TRANSACTION. On June 23, 1998, a special purpose
limited partnership, PMC Commercial Trust, Ltd. 1998-1 (the "1998 Partnership"),
created by the Company issued $66.1 million aggregate principal amount of its
loan-backed fixed rate notes (the "1998 Notes") in a private placement. The
Company owns, directly or indirectly, all of the interests in the 1998
Partnership. The 1998 Notes, issued at par, which have a stated maturity of May
1, 2019 and bear interest at the rate of 6.37% per annum, were collateralized by
an initial amount of approximately $71.9 million of loans contributed by the
Company to the 1998 Partnership. In connection with this transaction, the 1998
Notes were given a rating of "Aaa" by Moody's Investors Service, Inc. The terms
of the 1998 Notes provide that the partners of the 1998 Partnership are not
liable for any payments on the 1998 Notes. Accordingly, if the 1998 Partnership
fails to pay the 1998 Notes, the sole recourse of the holders of the 1998 Notes
is against the assets of the 1998 Partnership. The Company, therefore, has no
obligation to pay the 1998 Notes, nor do the holders of the 1998 Notes have any
recourse against the assets of the Company. The net proceeds from the issuance
of the 1998 Notes (approximately $46.5 million after giving effect to costs of
approximately $400,000, repayment of certain indebtedness related to the
contributed loans of approximately $14.6 million, a $2.2 million initial reserve
deposit held by the trustee as collateral and a deposit of $2.4 million
representing collections or prepayments on the underlying loans due to the
holders of the 1998 Notes) were distributed to the Company in accordance with
its interest in the 1998 Partnership. The Company utilized these proceeds to
help fund the acquisition of the Acquired Amerihost Properties.
LOAN PREPAYMENT CONSIDERATIONS
The terms of the loans originated by the Company provide that, subject
to certain exceptions and other qualifications described below, voluntary
prepayments of principal of the loans (each, a "Principal Prepayment") are
permitted but are required to be accompanied by a yield maintenance Charge (a
"Yield Maintenance Charge"), during all of their respective terms to maturity.
The Yield Maintenance Charge for each loan as to which Principal
Prepayments are required to be accompanied by a Yield Maintenance Charge, at any
time of determination, will generally be equal to the greater of either 95 days
of interest at the stated interest rate applied to the amount of principal being
prepaid, or a yield maintenance premium (the "Yield Maintenance Premium"). For
the majority of the Company's loans, the Yield Maintenance Premium is calculated
by multiplying the amount of principal being prepaid by the product of the
number of years remaining to maturity of the loan and the Reinvestment Rate (as
defined hereafter). For the majority of the loans, the "Reinvestment Rate" is
the difference between the U.S. Treasury Rate nearest to the loan's original
maturity at the time of origination of the loan and the 5-year U.S. Treasury
Rate at the time of prepayment. Generally, as prevailing interest rates decline,
the amount of the Yield Maintenance Premium increases. Some of the loans permit
the prepayment of up to 10% of the original loan principal balance per year
without penalty.
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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 Common Shares. As
interest rates have declined, the Company has experienced loan prepayments, and
such prepayments, as well as scheduled repayments, have generally been reloaned
at lower rates. A high volume of loan prepayments could 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.
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 that
significant doubt exists as to the ultimate realization of the loan. To date, a
$90,000 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
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
The net income of the Company increased by $826,000 (11%) from
$7,752,000 during the nine months ended September 30, 1997, to $8,578,000 during
the nine months ended September 30, 1998. The earnings per share of the Company
increased by approximately 6% from $1.25 per share for the nine months ended
September 30, 1997, to $1.32 per share for the nine months ended September 30,
1998. The weighted average shares outstanding increased by approximately 5% from
6,204,000 for the nine months ended September 30, 1997 to 6,492,000 for the nine
months ended September 30, 1998 as a result of shares issued pursuant to the
dividend reinvestment and cash purchase plan.
Interest income - loans increased by $895,000 (10%), from $9,126,000
during the nine months ended September 30, 1997, to $10,021,000 during the nine
months ended September 30, 1998. 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. These commitment fees are
non-refundable fees, collected as part of the origination of the 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
"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 for the rest of the 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.
14
17
This $895,000 increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the nine months ended September 30, 1998 as compared to the nine month period in
the prior year due to a reduction in funds available for short-term investments.
The average invested assets in loans to small businesses increased by $14.5
million (14%), from $103.1 million during the nine months ended September 30,
1997, to $117.6 million during the nine months ended September 30, 1998. The
annualized average yields on loans, including all loan fees earned, for the nine
months ended September 30, 1998 and 1997 were approximately 12.7% and 12.4%,
respectively. The increased yield was primarily a result of the recognition of
prepayment fees (included in other income as discussed below).
Lease income was $1,678,000 during the nine months ended September 30,
1998. This amount is attributable to the lease payments received on the
Amerihost Properties, acquired by the Company on June 30, 1998, pursuant to the
sales/leaseback agreement.
Interest and dividends - other investments decreased by $379,000 (63%),
from $603,000 during the nine months ended September 30, 1997, to $224,000
during the nine months ended September 30, 1998. 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 the 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 average short-term investments
of the Company decreased by $11.2 million (75%), from $15.0 million during the
nine months ended September 30, 1997, to $3.8 million during the nine months
ended September 30, 1998. The average yields on short-term investments during
the nine months ended September 30, 1998 and 1997 were approximately 5.0% and
5.4%, respectively.
Other income increased by $613,000, from $593,000 during the nine
months ended September 30, 1997, to $1,206,000 during the nine months ended
September 30, 1998. 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 the collection of prepayment fees during the nine months ended
September 30, 1998 of $953,000 compared to $347,000 during the nine months ended
September 30, 1997. During the nine months ended September 30, 1998 and 1997, 12
and 14 loans in the aggregate amounts of approximately $12.3 million and $13.5
million, respectively, paid in full. Prepayment fee income as a percentage of
prepaid loans was greater during the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 as a result of the "make
whole" provisions of the prepayment fees. 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. While the Company anticipates loan
prepayments in 1999 will be in amounts comparable to or slightly less than 1998,
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 "Loan Prepayment Considerations" and "Interest
Rate and Prepayment Risk." Additionally, income recognized from late fees on
loans increased by $23,000, from $24,000 during the nine months ended September
30, 1997, to $47,000 during the nine months ended September 30, 1998.
Pursuant to the Investment Management Agreements, as amended, the
Company incurred an aggregate of $2,078,000 in fees for the nine months ended
September 30, 1998. Of the total fees paid or payable to the Investment Manager
during the nine months ended September 30, 1998, $171,000 has been offset
against commitment fees as a direct cost of originating loans, $165,000 was
capitalized as part of the structured financing completed in June 1998, and a
$466,000 fee charged related to the acquisition of the Amerihost Properties was
capitalized as a cost of the properties. Investment management fees were
$1,203,000 for the nine months ended September 30, 1997. Of the total management
fees paid or payable to the Investment Manager during the nine months ended
September 30, 1997, $130,000 was offset against commitment fees as a direct cost
of originating
15
18
loans. The increase in investment management fees (based on the loans receivable
outstanding) from $1,203,000 during the nine months ended September 30, 1997 to
$1,339,000 during the nine months ended September 30, 1998 or $136,000 (prior to
offsetting direct costs related to the origination of loans), or 11%, is
primarily due to increases in the Company's invested assets and common equity
capital. The average invested assets as defined in the Investment Management
Agreements increased by $14.9 million (14%), from $103.1 million during the nine
months ended September 30, 1997, to $118.0 million during the nine months ended
September 30, 1998. The average common equity capital as defined in the
Investment Management Agreement increased by $5.3 million (6%), from $88.1
million during the nine months ended September 30, 1997, to $93.4 million during
the nine months ended September 30, 1998.
Legal and accounting fees increased by $14,000 (37%), from $38,000
during the nine months ended September 30, 1997, to $52,000 during the nine
months ended September 30, 1998.
General and administrative expenses increased by $36,000 (32%), from
$114,000 during the nine months ended September 30, 1997, to $150,000 during the
nine months ended September 30, 1998. This increase is primarily attributable to
an increase in costs related to printing and shareholder servicing expenses.
Interest expense during the nine months ended September 30, 1998 of
$2,555,000 consisted primarily of interest incurred on the 1996 Notes issued
pursuant to the 1996 Private Placement (approximately $666,000), the 1998 Notes
issued pursuant to the 1998 Private Placement (approximately $1,115,000)and the
revolving credit facility (approximately $582,000). During the nine months ended
September 30, 1997, interest expense of $1,295,000 consisted of interest
incurred on the 1996 Notes issued pursuant to the 1996 Private Placement
(approximately $1,235,000).
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, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
The net income of the Company increased by $607,000 (23%) from
$2,608,000 during the three months ended September 30, 1997, to $3,215,000
during the three months ended September 30, 1998. The earnings per share of the
Company increased by approximately 17% from $0.42 per share for the three months
ended September 30, 1997, to $0.49 per share for the three months ended
September 30, 1998. The weighted average shares outstanding increased by
approximately 4% from 6,275,000 for the three months ended September 30, 1997 to
6,512,000 for the three months ended September 30, 1998 as a result of shares
issued pursuant to the dividend reinvestment and cash purchase plan.
Interest income - loans increased by $452,000 (14%), from $3,126,000
during the three months ended September 30, 1997, to $3,578,000 during the three
months ended September 30, 1998. 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. These commitment fees are
non-refundable fees, collected as part of the origination of the 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
"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 for the rest of the 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 $452,000 increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the three months ended September 30, 1998 as compared to the three month period
in the prior year due to a reduction in funds available for short-term
investments. The average invested assets in loans to small businesses increased
by $18.2 million (17%), from $106.5 million during the three months ended
September 30, 1997, to $124.7 million during the three months ended September
30, 1998. The annualized average yields on loans, including all loan fees
earned, for the three months ended September 30, 1998 and 1997 were
16
19
approximately 13.6% and 12.2%, respectively. The increased yield was primarily a
result of the recognition of prepayment fees (included in other income as
discussed below). Interest income - loans includes interest earned on loans, the
accretion of discounts on purchased loans and the accretion of deferred
commitment fees.
Lease income was $1,661,000, during the three months ended September
30, 1998. This increase was attributable to the lease payments received on the
Amerihost Properties, acquired by the Company on June 30, 1998, pursuant to the
sale/leaseback agreement.
Interest and dividends - other investments decreased by $59,000 (41%)
from $144,000 during the three months ended September 30, 1997, to $85,000
during the three months ended September 30, 1998. 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 the 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 average short-term investments
of the Company decreased by $2.9 million from $10.0 million during the three
months ended September 30, 1997, to $7.1 million during the three months ended
September 30, 1998. The average yields on short-term investments during the
three months ended September 30, 1998 and 1997 were approximately 5.1% and 5.7%,
respectively.
Other income increased by $473,000 (305%), from $155,000 during the
three months ended September 30, 1997, to $628,000 during the three months ended
September 30, 1998. 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 principally
attributable to the collection of prepayment fees during the three months ended
September 30, 1998 of $545,000 compared to $65,000 during the three months ended
September 30, 1997. During the three months ended September 30, 1998 and 1997,
five and three loans in the aggregate amounts of approximately $5.9 million and
$3.9 million, respectively, paid in full. Prepayment fee income as a percentage
of prepaid loans was greater during the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997 as a result of the "make
whole" provisions of the prepayment fees. 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. While the Company anticipates loan
prepayments in 1999 will be in amounts comparable to or slightly less than 1998,
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 "Loan Prepayment Considerations" and "Interest
Rate and Prepayment Risk." Also, late payment fees were $14,000 during the three
months ended September 30, 1998 compared to $4,000 during the three months ended
September 30, 1997. The increase was partially offset by income recognized from
other loan-related fees, such as assumption, modification and extension fees.
These fees decreased by $17,000 from $86,000 during the three months ended
September 30, 1997, to $69,000 during the three months ended September 30, 1998.
Pursuant to the Investment Management Agreements, as amended, the
Company incurred an aggregate of $571,000 in fees for the three months ended
September 30, 1998. Of the total fees paid or payable to the Investment Manager
during the three months ended September 30, 1998, $45,000 has been offset
against commitment fees as a direct cost of originating loans. Included in
investment management fees for the three months ended September 30, 1998 is
$108,000 in fees related to the Amerihost Properties. Investment management fees
were $405,000 for the three months ended September 30, 1997. Of the total
management fees paid or payable to the Investment Manager during the three
months ended September 30 ,1997, $36,000 was offset against commitment fees as a
direct cost of originating loans. The increase in investment management fees
(excluding the fees relating to the Amerihost Properties) from $441,000 during
the three months ended September 30, 1997 to $463,000 during the three months
ended September 30, 1998 or $22,000 (prior to offsetting direct costs related to
the origination of loans), or 5%, is primarily due to increases in the Company's
invested assets and common equity capital. The average invested assets as
defined in the Investment Management Agreements increased by $19.8 million
(19%), from $105.1 million during the three months ended September 30, 1997, to
$124.9 million during the three months ended September 30, 1998. The average
common equity capital as defined in the Investment Management Agreement
increased by $4.6
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20
million (5%) from $89.4 million during the three months ended September 30,
1997, to $94.0 million during the three months ended September 30, 1998.
Legal and accounting fees were $8,000 for the three months ended
September 30, 1998. There were no legal and accounting fees for the three months
ended September 30, 1997.
General and administrative expenses increased by $12,000 (32%), from
$37,000 during the three months ended September 30, 1997, to $49,000 during the
three months ended September 30, 1998. This increase is primarily attributable
to an increase in costs related to printing and shareholder servicing expenses.
Interest expense during the three months ended September 30, 1998 of
$1,656,000 consisted primarily of interest incurred on the notes issued pursuant
to the 1996 Private Placement (approximately $192,000), the 1998 Private
Placement (approximately $1,021,000) and interest on the revolving credit
facility (approximately $367,000). During the three months ended September 30,
1997, interest expense of $397,000 consisted primarily of interest incurred on
the 1996 Private Placement (approximately $365,000).
As the Company is currently qualified as a real estate investment trust
under the applicable provisions of the Code, there are no provisions in the
financial statements for Federal income taxes.
CASH FLOW ANALYSIS
The Company generated $11,059,000 and $6,751,000 from operating
activities during the nine months ended September 30, 1998 and 1997,
respectively. The increase of $4,308,000 (64%) was primarily due to an increase
in net income of $826,000 from $7,752,000 during the nine months ended September
30, 1997 to $8,578,000 during the nine months ended September 30, 1998,
fluctuations in borrower advances which increased by $1,353,000 from a use of
$569,000 during the nine months ended September 30, 1997, to a source of
$784,000 during the nine months ended September 30, 1998, the change related to
"due to affiliates" which increased by $548,000 from a use of $285,000 during
the nine months ended September 30,1997, to a source of $263,000 during the nine
months ended September 30, 1998 and an increase in other liabilities from
$23,000 during the nine months ended September 30, 1997 to $1,533,000 during the
nine months ended September 30, 1998. The increase in other liabilities is due
to deposits, held by the Company for Amerihost, pursuant to the sale/leaseback
agreement (approximately $1,050,000) and, the accrual of merger related costs
(approximately $569,000) related to the terminated Supertel merger.
The Company used $80,701,000 and $18,644,000 through investing
activities during the nine months ended September 30, 1998 and 1997,
respectively. The increased use of funds of $62,057,000 was due primarily to:
(i) the purchase of 26 motel properties from Amerihost for $62,200,000, and (ii)
a decrease in principal collected on loans of $766,000 (primarily due to loan
prepayments) during the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997. This increased use of funds was partially
offset by a decrease of $1,753,000 in loans funded during the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997.
The Company provided $69,731,000 and used $10,349,000 from financing
activities during the nine months ended September 30, 1998 and 1997,
respectively. During the nine months ended September 30, 1998, the increased
source of funds is primarily due to the issuance of $66,100,000 in loan backed
fixed rate notes under the 1998 Partnership private placement and an increase in
net borrowings of $22,305,000 under the Company's revolving credit facility. 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 $1,047,000 from $7,165,000
during the nine months ended September 30, 1997, to $8,212,000 during the nine
months ended September 30, 1998. This increase 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, to
acquire commercial properties 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.
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At September 30, 1998, the Company had $125,000 of cash and cash
equivalents and approximately $15.6 million of total loan commitments
outstanding to 18 small business concerns predominantly in the lodging industry.
The weighted average interest rate on these loan commitments at September 30,
1998 was 9.2%. Of those commitments, approximately $8.4 million related to 12
partially funded construction loans. Approximately $1.2 million of funding
commitments remained on four 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 and the acquisition of commercial properties, the
Company intends to use: (i) its short-term credit facility as described below,
(ii) the placement of long-term borrowings, (iii) the issuance of debt
securities, and/or (iv) the 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.
As a result of the current volatile market conditions for asset backed
securities such as securities offered by the Company, there can be no assurance
that similar types of securitizations or structured financings will be able to
be completed or, if completed, will be on the terms attained on similar
transactions completed by the Company. If additional funds are required, the
Company will attempt to either issue unsecured notes and/or privately or
publicly raise equity.
Pursuant to the Investment Management Agreement relating to the
Company's loan portfolio, if the Company does not have available capital to fund
outstanding commitments, the Investment Manager will refer such commitments to
affiliates of the Company with respect to which the Company will receive no
fees. The ability of the Company to meet its liquidity needs will depend on its
ability to borrow funds or issue equity securities on favorable terms.
The Company has a revolving credit facility (the "Revolver") providing
funds to originate loans collateralized by commercial real estate. The Revolver,
as amended in June 1998, provides the Company up to the lesser of $30 million or
an amount equal to 50% of the value of the underlying property collateralizing
the borrowings or up to 40% of the Company's owned properties. In addition,
pursuant to the amendment to the Revolver, the bank has extended an additional
$10.0 million through an uncommitted credit facility (the "Guidance Line")
available at the discretion of the bank. At September 30, 1998, the Company had
$22.3 million of outstanding borrowings under the Revolver and $7.7 million
available thereunder ($17.7 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 SBA 504
Program loan takeouts. Management anticipates these sources of funds, proceeds
from an additional structured sale or securitization of loans and/or properties
and proceeds from loan prepayments will be adequate to meet its existing
obligations.
During 1996, the Company completed the 1996 Private Placement of
approximately $29.5 million of the 1996 Notes, issued pursuant to a rated
structured financing, which are collateralized by the 1996 Partnership's
commercial loan portfolio. The 1996 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 Revolver. 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 1996 Partnership's outstanding portfolio has a weighted
average coupon of approximately 11.1%). In July 1996, the Company completed the
sale of 2,335,000 Common Shares pursuant to a public offering (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 1996
Private Placement and the Offering.
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During 1998, the Company completed the 1998 Private Placement of
approximately $66.1 million of the 1998 Notes, issued pursuant to a rated
structured financing, which are collateralized by the 1998 Partnership's
commercial loan portfolio. The 1998 Private Placement resulted in net proceeds
to the Company of approximately $61.2 million, of which approximately $14.6
million were used to repay outstanding borrowings under the Revolver. Cash flow
on these leveraged funds is materially dependent on the spread between the rate
at which it borrowed these funds (6.37%) and the rate obtained on loan of these
funds (presently the 1998 Partnership's outstanding portfolio has a weighted
average coupon of approximately 10.6%).
The Company's business is dependent upon 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 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 "Loan Prepayment
Considerations" and "Interest Rate and Prepayment Risk".
Earnings and profits, which will determine the taxability of dividends
to shareholders, will differ from net income reported for financial reporting
purposes due to the (i) differences for federal tax purposes in the estimated
useful lives and methods used to compute depreciation and (ii) the recognition
of commitment fees collected on loan originations. No distributions made through
September 30, 1998 are considered to be a return of capital.
YEAR 2000 MANAGEMENT
In order to address the computer industry's "Year 2000" problem, the
Company is in the process of monitoring the Investment Manager's upgrades to
their accounting software. Management does not believe the costs for this
upgrade will be significant. The Company is in the process of determining
whether the company that manages the Amerihost Properties is in the process of
studying the "Year 2000" issue. Upon completion, the Company will determine the
extent to which it is vulnerable to third parties' failure to remedy their own
"Year 2000" issues and the costs associated with resolving this issue.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely accepted
and appropriate measure of performance for an equity or hybrid REIT that
provides a relevant basis for comparison among REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts (NAREIT), means income
(loss) before minority interest (determined in accordance with GAAP), excluding
gains (losses) from debt restructuring and sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from the
methods used by other REITs and, accordingly, may be not be comparable to such
other REITs. The formulation of FFO below is consistent with the NAREIT White
Paper Definition of FFO. FFO (i) does not represent cash flows from operations
as defined by GAAP, (ii) is not indicative of cash available to fund all cash
flow needs and liquidity, including its ability to make distributions, and (iii)
should not be considered as an alternative to net income (as determined in
accordance with GAAP) for purposes of evaluating the Company's operating
performance. For a complete discussion of the Company's cash flows from
operations, please see "Cash Flow Analysis."
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The Company's FFO for the periods ended September 30, 1998 and 1997 was computed
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income $ 3,215 $ 2,608 $ 8,578 $ 7,752
Add depreciation and
amortization 488 -- 488 --
------- ------- ------- -------
FFO $ 3,703 $ 2,608 $ 9,066 $ 7,752
======= ======= ======= =======
Weighted average shares 6,512 6,275 6,492 6,204
RECENT ACCOUNTING PRONOUNCEMENTS
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. The
requirements of SFAS No. 131 are not required in interim financial statements in
the initial year of adoption.
Accounting for Contingent Rent in Interim Financial Periods
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9 , "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998, the Task Force
issued transition guidance stating that the consensus could be applied on a
prospective basis or in a manner similar to a change in accounting principle
effective April 1, 1998. The Company has reviewed the terms of its leases and
has determined that the provisions of EITF 98-9 will not impact the Company's
current revenue recognition, the Company's annual percentage lease revenue or
cash flow from its third party lessees.
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 property acquisitions and the 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.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
99.1 PMC Commercial Trust Pro Forma Financial
Information (Unaudited) *
B. Forms 8-K
The registrant filed a Form 8-K on September 25,
1998 relating to the proposed transaction with
Supertel Hospitality, Inc.
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* Previously filed as Exhibit 99.1 of the Registrant's Form 10-Q for the
quarter ending September 30, 1998 and incorporated herein by reference.
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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: 2/19/99 \s\ Lance B. Rosemore
---------------------------------------------
Lance B. Rosemore
President
Date: 2/19/99 \s\ Barry N. Berlin
---------------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
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