<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 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 August 1, 1998, Registrant had outstanding 6,512,055 Common Shares of
Beneficial Interest, par value $.01 per share.
<PAGE> 2
PMC COMMERCIAL TRUST AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Six Months Ended June 30, 1998 and 1997 3
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
PART I
Financial Information
ITEM 1.
Financial Statements
1
<PAGE> 4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
INVESTMENTS:
Loans receivable, net............................................. $ 124,537 $ 109,132
Cash equivalents.................................................. 153 32
Restricted investments............................................ 7,904 5,766
------------ -------------
TOTAL INVESTMENTS................................................... 132,594 114,930
------------ -------------
PROPERTY, PLANT AND EQUIPMENT:
Land......................................................... 6,900 -
Buildings.................................................... 51,106 -
Furniture, fixtures and equipment 4,725 -
------------ -------------
TOTAL PROPERTY, PLANT AND EQUIPMENT................................. 62,731 -
------------ -------------
OTHER ASSETS:
Cash.............................................................. 10 4
Interest receivable............................................... 716 654
Deferred borrowing costs, net..................................... 813 280
Other assets, net................................................. 262 9
------------ -------------
TOTAL OTHER ASSETS.................................................. 1,801 947
------------ -------------
TOTAL ASSETS........................................................ $ 197,126 $ 115,877
============ =============
LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Notes payable..................................................... $ 95,671 $ 18,721
Borrower advances................................................. 1,521 1,431
Dividends payable................................................. 2,864 2,749
Unearned commitment fees.......................................... 817 948
Due to affiliates................................................. 1,461 344
Unearned construction monitoring fees............................. 49 67
Interest payable.................................................. 236 182
Other liabilities................................................. 1,345 193
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TOTAL LIABILITIES................................................... 103,964 24,635
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COMMITMENTS AND CONTINGENCIES
BENEFICIARIES' EQUITY:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,509,231 and
6,392,518 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively.......................... 65 64
Additional paid-in capital........................................ 93,938 91,687
Cumulative net income............................................. 31,040 25,677
Cumulative dividends.............................................. (31,881) (26,186)
------------ -------------
Total beneficiaries' equity......................................... 93,162 91,242
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TOTAL LIABILITIES AND BENEFICIARIES' EQUITY......................... $ 197,126 $ 115,877
============ =============
Net asset value per share........................................... $14.31 $14.27
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 5
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1998 1997
------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Interest income - loans........................................ $ 6,443 $ 6,000
Lease income................................................... 17 -
Interest and dividends - other investments..................... 139 459
Other income................................................... 578 438
------------- --------------
TOTAL REVENUES................................................... 7,177 6,897
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EXPENSES:
Interest....................................................... 899 898
Advisory and servicing fees to affiliate, net.................. 750 700
General and administrative..................................... 101 77
Provision for loan losses...................................... 20 40
Legal and accounting fees...................................... 44 38
------------- --------------
TOTAL EXPENSES................................................... 1,814 1,753
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NET INCOME....................................................... $ 5,363 $ 5,144
============= ==============
Weighted average shares outstanding.............................. 6,481,794 6,167,832
============= ==============
Basic and diluted earnings per share............................. $ 0.83 $ 0.83
============= ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1998 1997
------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Interest income - loans........................................ $ 3,360 $ 3,223
Lease income................................................... 17 -
Interest and dividends - other investments..................... 74 172
Other income................................................... 221 338
------------- --------------
TOTAL REVENUES................................................... 3,672 3,733
------------- --------------
EXPENSES:
Interest....................................................... 494 454
Advisory and servicing fees to affiliate, net.................. 368 369
General and administrative..................................... 69 46
Provision for loan losses...................................... 10 20
Legal and accounting fees...................................... 24 24
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TOTAL EXPENSES................................................... 965 913
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NET INCOME....................................................... $ 2,707 $ 2,820
============= ==============
Weighted average shares outstanding.............................. 6,508,942 6,208,173
============= ==============
Basic and diluted earnings per share............................. $ 0.42 $ 0.45
============= ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1998 1997
------------ -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 5,363 $ 5,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount and fees................................ (157) (489)
Amortization of organization and borrowing costs.............. 102 27
Provision for loan losses..................................... 20 40
Commitment fees collected, net................................ 156 379
Construction monitoring fees collected, net................... 18 43
Changes in operating assets and liabilities:
Accrued interest receivable............................... (62) 8
Other assets.............................................. (258) (37)
Interest payable.......................................... 55 (9)
Borrower advances......................................... 89 (1,288)
Due to affiliates......................................... 1,117 (244)
Other liabilities......................................... 1,152 2
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 7,595 3,576
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded...................................................... (25,679) (26,750)
Principal collected............................................... 10,088 12,653
Purchase of property, plant and equipment......................... (62,731) -
Investment in restricted investments, net......................... (2,138) (3,742)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES............................... (80,460) (17,839)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares.......................... 2,072 2,267
Proceeds from issuance of notes payable.......................... 106,060 -
Payment of dividends............................................. (5,399) (4,735)
Payment of principal on notes payable............................ (29,111) (1,688)
Payment of issuance costs........................................ (630) (16)
------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. 72,992 (4,172)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 127 (18,435)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 36 25,984
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 163 $ 7,549
============ =============
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested............................................. $ 181 $ 226
============ =============
Dividends declared, not paid..................................... $ 2,864 $ 2,556
============ =============
Interest paid.................................................... $ 746 $ 886
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 8
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 June
30, 1998 and the consolidated statements of income for the three and six months
ended June 30, 1998 and 1997 and the consolidated statements of cash flows for
the six months ended June 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 June 30, 1998, and the results of operations for the three
and six months ended June 30, 1998 and 1997 and the cash flows for the six
months ended June 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 six months ended June 30, 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 "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 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 April 1998, the
Company paid $0.435 per share in dividends to common shareholders of record on
March 31, 1998. During June 1998, the Company declared a $0.440 per share
dividend to common shareholders of record on June 30, 1998 which was paid on
July 13, 1998.
NOTE 4. RELATED PARTY TRANSACTIONS
Pursuant to investment management agreements (the "Investment
Management Agreements") between the Company and PMC Capital, Inc. (an affiliated
entity), through its investment management subsidiaries (the "Investment
Manager"), the Company incurred fees of approximately $1,507,000 for the six
months ended June 30, 1998. Of the servicing and advisory fees incurred under
the Investment Management Agreements during the six months ended June 30, 1998,
$126,000 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 5).
Pursuant to an 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")
6
<PAGE> 9
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
Pursuant to an 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 connection with the
consummation of a proposed merger by the Company with Supertel Hospitality, Inc.
("Supertel"), the Company will pay the Investment Manager a one time fee equal
to the product of 1.0% multiplied by the dollar value of the Company's common
shares of beneficial interest issued to Supertel stockholders in connection with
the Merger and the Investment Manager will be paid an annual management fee of
$200,000 plus 1.0% of the gross revenues (as defined in the master lease between
the Company and the operators of the properties acquired from Supertel) up to
and including $50,000,000 and 2.0% of gross revenues in excess of $50,000,000
(the "Supertel 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 and the Supertel Fee for
a period of five years from the termination date.
NOTE 5. 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 $12.7 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 of approximately $22.2 million of
principal outstanding at June 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 $66.1 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 of approximately $70.5 million of
principal outstanding at June 30, 1998.
As of June 30, 1998, the Company had $16.9 million outstanding pursuant
to a revolving credit facility (the "Revolver"). The interest rate on such
advances under the Revolver was approximately 7.7% at June 30, 1998.
NOTE 6. NET INCOME PER SHARE
The weighted average number of common shares of beneficial interest
outstanding were 6,481,794 and 6,167,832 for the six months ended June 30, 1998
and 1997 and 6,508,942 and 6,208,173 for the three months ended June 30, 1998
and 1997, respectively. For purposes of calculating diluted earnings per share,
the weighted average shares outstanding were increased by approximately 4,800
and 7,000 for the effect of stock options during the six months ended June 30,
1998 and 1997 and approximately 4,800 and 7,000 for the three months ended June
30, 1998 and 1997, respectively.
7
<PAGE> 10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. 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.
NOTE 8. 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,
subject to certain conditions, and, as a result, the fixed lease payment would
increase to $7.3 million per year. Amerihost agreed to guarantee the lease
payment obligations of Amerihost Inns.
NOTE 9. PROPOSED MERGER
On June 3, 1998, the Company entered into an Agreement and Plan of
Merger pursuant to which Supertel will merge with and into the Company, subject
to the satisfaction of certain conditions to closing. The consideration to be
paid by the Company would be 0.6 common shares of the Company (the "Common
Shares") for each share of Supertel, subject to adjustment in the event the
average trading price of the Common Shares for the ten trading days ending five
days before the respective shareholder meetings to approve the merger drops
below $17.50 or increases above $24.00. The merger has been approved by the
boards of both companies, but is subject to a number of conditions, including
approval by at least two thirds of the shareholders of the Company and a
majority of the stockholders of Supertel.
Under the agreement, the Company would acquire the hotel assets of
Supertel in a transaction valued at approximately $134 million, including
approximately $61 million of equity (based on the closing price of the PMC
Commercial common shares on June 3, 1998) with the remainder consisting of the
assumption of debt and/or cash.
The 62 hotels (containing 4,453 rooms) to be acquired by the Company
pursuant to the merger will be leased to Norfolk Hospitality Management Co. (the
"Lessee"), an entity to be owned by certain officers and employees of Supertel.
The Lessee will pay an annual base rent of $15,000,000 (including certain
reserve requirements of $600,000) plus additional rent in the amount of 20% of
every dollar of annual gross revenues in excess of $42,000,000 and 25% of every
dollar of gross revenues in excess of $50,000,000. The lease agreement has a
five year initial term with options for two additional two year terms.
8
<PAGE> 11
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.
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 six months ended June 30, 1998 the Company funded
loans of $16.3 and $25.7 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. A substantial portion of such loan
originations were to corporations and individuals in the lodging industry.
As of June 30, 1998 and December 31, 1997, the total portfolio
outstanding was $126.4 million and $110.8 million, respectively ($124.5 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 10.7%. 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 six months ended June 30, 1998
and the years ended December 31, 1997, 1996 and 1995 were approximately 12.1%,
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 June 30, 1998 are $2.6 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 June 30, 1998, the Company had one loan which was greater than 30
days delinquent. The aggregate principal balance outstanding of the delinquent
loan was approximately $800,000 (1%) of the total outstanding principal balance
of the loan portfolio). As of June 30, 1998, the Company has established a
reserve in the amount of $80,000 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.
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 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.
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
9
<PAGE> 12
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.
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. The Company intends to acquire the remaining four Amerihost Properties,
subject to certain conditions,and,as a result, the fixed lease payment would
increase to $7.3 million per year. Amerihost agreed to guarantee the lease
payment obligations of Amerihost Inns.
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
remaining four Amerihost Properties will be acquired by the Company subject to
the assumption of the debt existing on such four properties. The Company must
consummate the acquisitions of any or all of the remaining four properties by
June 30, 1999.
Certain information regarding the 26 Acquired Amerihost Properties
currently owned by the Company is set forth below:
<TABLE>
<CAPTION>
CITY STATE ROOMS IN HOTEL
---- ----- --------------
<S> <C> <C>
Anderson California 61
Yreka California 61
Smyrna Georgia 60
Eagles Landing Georgia 60
La Grange Georgia 59
Rochelle Illinois 61
Storm Lake Iowa 61
Mt. Pleasant Iowa 63
Hudsonville Michigan 61
Grand Rapids South Michigan 61
Coopersville Michigan 60
Grand Rapids North Michigan 60
Monroe Michigan 63
Port Huron Michigan 61
Tupelo Mississippi 61
Warrenton Missouri 63
Mansfield Ohio 60
Ashland Ohio 62
Wooster East Ohio 58
Wooster North Ohio 60
Shippensburg Pennsylvania 60
Grove City Pennsylvania 61
Jackson Tennessee 61
McKinney Texas 61
Mosinee Wisconsin 53
Kimberly Wisconsin 63
-----
TOTAL NUMBER OF ROOMS 1,575
=====
</TABLE>
10
<PAGE> 13
The four remaining Amerihost Properties which the Company may acquire
are located in Macomb, Illinois'; Sycamore, Illinois; Plainfield, Indiana and
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.
SUPERTEL TRANSACTION. On June 3, 1998, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Supertel
will merge (the "Merger") with and into the Company. The consideration to be
paid by the Company would be 0.6 common shares of beneficial interest of the
Company (the "Common Shares") for each share of Supertel, subject to adjustment
in the event the average trading price of the Common Shares for the ten trading
days ending five days before the respective shareholder meetings to approve the
merger drops below $17.50 or increases above $24.00. The Merger has been
approved by the boards of both companies, but is subject to a number of
conditions, including approval by at least two thirds of the shareholders of the
Company and a majority of the stockholders of Supertel.
Additionally, the Merger Agreement provides that the stockholders of
Supertel will receive a pre-closing dividend of certain of Supertel's earnings
and profits which, if less than $3.00 per share of Supertel common stock, allows
Supertel to terminate the agreement. The special dividend would be payable only
if the Merger occurs. The Merger is expected to be consummated in October or
November 1998.
Under the Merger Agreement, the Company would acquire the 62 hotel
assets and assume certain liabilities of Supertel in a transaction valued at
approximately $134 million, including approximately $61 million of equity (based
on the closing price of the Common Shares on June 3, 1998) with the remainder
consisting of the assumption of debt and/or cash.
The 62 hotels (containing 4,453 rooms) to be acquired by the Company
pursuant to the Merger will be leased to Norfolk Hospitality Management Co. (the
"Lessee"), an entity to be owned by certain officers and employees of Supertel.
The Lessee will pay an annual base rent of $15,000,000 (including certain
reserve requirements of $600,000) plus additional rent in the amount of 20% of
every dollar of annual gross revenues in the excess of $42,000,000 and 25% of
every dollar of gross revenues in excess of $50,000,000. The lease agreement has
a five year initial term with options for two additional two year terms.
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 1998
Partnership has the exclusive obligation for repayment of the 1998 Notes and the
holders of the 1998 Notes have no recourse to the Company or its assets in the
event of nonpayment. 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
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<PAGE> 14
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.
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 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"). 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
$80,000 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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
The net income of the Company during the six months ended June 30, 1998
and 1997, was $5.4 million and $5.1 million, respectively, $0.83 per share
during both periods. The weighted average shares outstanding increased by
approximately 5% from 6,167,832 for the six months ended June 30, 1997 to
6,481,794 for the six months ended June 30, 1998 as a result of shares issued
pursuant to the dividend reinvestment and cash purchase plan.
Interest income - loans increased by $443,000 (7%), from $6,000,000
during the six months ended June 30, 1997, to $6,443,000 during the six months
ended June 30, 1998. This increase was primarily attributable to the
reallocation of the Company's investments from cash and government securities to
higher-yielding loans to small businesses. The average invested assets in loans
to small businesses increased by $13.0 million (13%), from $101.5 million during
the six months ended June 30, 1997, to $114.5 million during the six months
ended June 30, 1998. The annualized average yields on loans, including all loan
fees earned, for the six months ended June 30, 1998 and 1997 were approximately
12.1% and 12.5%, respectively. The decreased yield was primarily a result of the
recognition of prepayment fees (included in other income as discussed below) and
the remaining unamortized deferred fees as income on loan prepayments which were
greater during the six months ended June 30, 1997 than during the six months
ended
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<PAGE> 15
June 30, 1998. During the six months ended June 30, 1998 and 1997, six and 11
loans in the amount of approximately $6.4 million and $9.9 million,
respectively, paid in full with a corresponding recognition of approximately
$104,000 and $186,000, respectively, of deferred fee income. Interest income -
loans includes interest earned on loans, the accretion of a discount on
purchased loans and the accretion of deferred commitment fees.
Lease income was $17,000 during the six months ended June 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
sales/leaseback agreement.
Interest and dividends - other investments decreased by $320,000 (70%),
from $459,000 during the six months ended June 30, 1997, to $139,000 during the
six months ended June 30, 1998. This decrease was due to a decrease in
short-term investments. The average short-term investments of the Company
decreased by $14.7 million (86%), from $17.1 million during the six months ended
June 30, 1997, to $2.4 million during the six months ended June 30, 1998. The
average yields on short-term investments during the six months ended June 30,
1998 and 1997 were approximately 4.8% and 5.4%, respectively.
Other income increased by $140,000, from $438,000 during the six months
ended June 30, 1997, to $578,000 during the six months ended June 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. This increase was primarily attributable to the collection of
prepayment fees during the six months ended June 30, 1998 of $408,000 compared
to $282,000 during the six months ended June 30, 1997. Additionally, income
recognized from late fees on loans increased by $13,000, from $20,000 during the
six months ended June 30, 1997, to $33,000 during the six months ended June 30,
1998.
Pursuant to the Investment Management Agreements, as amended, the
Company incurred an aggregate of $1,506,000 in fees for the six months ended
June 30, 1998. Of the total fees paid or payable to the Investment Manager
during the six months ended June 30, 1998, $126,000 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 for the acquisition of the Amerihost Properties was capitalized as a
cost of the properties. Investment management fees were $791,000 for the six
months ended June 30, 1997. Of the total management fees paid or payable to the
Investment Manager during the six months ended June 30, 1997, $91,000 was offset
against commitment fees as a direct cost of originating loans. The increase in
investment management fees (based on the loans receivable outstanding) from
$791,000 during the six months ended June 30, 1997 to $876,000 during the six
months ended June 30, 1998 of $85,000 (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
increased by $14.9 million (15%), from $100.7 million during the six months
ended June 30, 1997, to $115.6 million during the six months ended June 30,
1998. The average common equity capital increased by $5.8 million (7%), from
$87.4 million during the six months ended June 30, 1997, to $93.2 million during
the six months ended June 30, 1998.
Legal and accounting fees increased by $6,000 (16%), from $38,000
during the six months ended June 30, 1997, to $44,000 during the six months
ended June 30, 1998. This increase is attributable to an increase in corporate
legal fees and audit fees during the six months ended June 30, 1998.
General and administrative expenses increased by $24,000 (31%), from
$77,000 during the six months ended June 30, 1997, to $101,000 during the six
months ended June 30, 1998. This increase is primarily attributable to an
increase in costs related to printing and shareholder servicing expenses.
Interest expense during the six months ended June 30, 1998 consisted
primarily of interest incurred on the Notes issued pursuant to the 1996 Private
Placement (approximately $474,000), the 1998 Private Placement (approximately
$94,000), the revolving credit facility (approximately $215,000) and interest
incurred on borrower advances (approximately $20,000). During the six months
ended June 30, 1997, interest expense consisted of interest incurred on the
Notes issued pursuant to the 1996 Private Placement (approximately $870,000),
and interest incurred on borrower advances (approximately $43,000).
As the Company is currently qualified as a Real Estate Investment Trust
("REIT") under the applicable provisions of the Internal Revenue Code of 1986,
as amended ("the Code"), there are no provisions in the financial statements for
Federal income taxes.
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1997
The net income of the Company during the three months ended June 30,
1998 and 1997, was $2,707,000 and $2,820,000, or $0.42 and $0.45 per share,
respectively. The weighted average shares outstanding increased by approximately
5% from 6,208,173 for the three months ended June 30, 1997 to 6,508,942 for the
three months ended June 30, 1998 as a result of shares issued pursuant to the
dividend reinvestment and cash purchase plan.
Interest income - loans increased by $137,000 (4%), from $3,223,000
during the three months ended June 30, 1997, to $3,360,000 during the three
months ended June 30, 1998. This increase was primarily attributable to the
reallocation of the Company's investments from cash and government securities to
higher-yielding loans to small businesses. The average invested assets in loans
to small businesses increased by $12.3 million (12%), from $105.8 million during
the three months ended June 30, 1997, to $118.1 million during the three months
ended June 30, 1998. The annualized average yields on loans, including all loan
fees earned, for the three months ended June 30, 1998 and 1997 were
approximately 11.8% and 13.3%, respectively. 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 $17,000, during the three months ended June 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 $98,000 (57%)
from $172,000 during the three months ended June 30, 1997, to $74,000 during the
three months ended June 30, 1998. This decrease was due to a decrease in
short-term investments. The average short-term investments of the Company
decreased by $6.8 million from $12.4 million during the three months ended June
30, 1997, to $5.6 million during the three months ended June 30, 1998. The
average yields on short-term investments during the three months ended June 30,
1998 and 1997 were approximately 4.9% and 5.5%, respectively.
Other income decreased by $117,000 (35%), from $338,000 during the
three months ended June 30, 1997, to $221,000 during the three months ended June
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. The decrease was principally attributable to the
collection of prepayment fees during the three months ended June 30, 1998 of
$156,000 compared to $265,000 during the three months ended June 30, 1997.
Additionally, income recognized from other loan-related fees, such as
assumption, modification and extension fees, decreased by $20,000 from $66,000
during the three months ended June 30, 1997, to $46,000 during the three months
ended June 30, 1998. This decrease was partially offset by late payment fees of
$18,000 during the three months ended June 30, 1998 compared to $7,000 during
the three months ended June 30, 1997.
Pursuant to the Investment Management Agreements, as amended, the
Company incurred an aggregate of $1,084,000 in fees for the three months ended
June 30, 1998. Of the total fees paid or payable to the Investment Manager
during the three months ended June 30, 1998, $86,000 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 for the acquisition of the Amerihost Properties was capitalized as a
cost of the properties. Investment management fees were $405,000 for the three
months ended June 30, 1997. Of the total management fees paid or payable to the
Investment Manager during the three months ended June 30 ,1997, $36,000 was
offset against commitment fees as a direct cost of originating loans. The
increase in investment management fees (based on the loans receivable
outstanding) from $441,000 during the three months ended June 30, 1997 to
$453,000 during the three months ended June 30, 1998 or $12,000 (prior to
offsetting direct costs related to the origination of loans), or 3%, is
primarily due to increases in the Company's invested assets and common equity
capital. The average invested assets increased by $13.9 million (13%), from
$105.1 million during the three months ended June 30, 1997, to $119.0 million
during the three months ended June 30, 1998. The average common equity capital
increased by $5.8 million (7%) from $88.2 million during the three months ended
June 30, 1997, to $94.0 million during the three months ended June 30, 1998.
Legal and accounting fees were $24,000 during both the three months
ended June 30, 1998 and 1997.
General and administrative expenses increased by $23,000 (50%), from
$46,000 during the three months ended June 30, 1997, to $69,000 during the three
months ended June 30, 1998. This increase is primarily attributable to an
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<PAGE> 17
increase in costs related to printer and shareholder servicing expenses.
Interest expense during the three months ended June 30, 1998 consisted
primarily of interest incurred on the notes issued pursuant to the 1996 Private
Placement (approximately $214,000), the 1998 Private Placement (approximately
$94,000) interest on the revolving credit facility (approximately $153,000) and
interest incurred on borrower advances (approximately $10,000). During the three
months ended June 30, 1997, interest expense consisted primarily of interest
incurred on the 1996 Private Placement (approximately $425,000) and interest
incurred on borrower advances (approximately $18,000).
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 $7,595,000 and $3,576,000 from operating
activities during the six months ended June 30, 1998 and 1997, respectively. The
increase of $4,019,000 (112%) was primarily due to fluctuations in borrower
advances which increased by $1,377,000 from a use of $1,288,000 during the six
months ended June 30, 1997, to a source of $89,000 during the six months ended
June 30, 1998, an increase in net income from $5,144,000 during the six months
ended June 30, 1997 to $5,363,000 during the six months ended June 30, 1998, the
change related to "due to affiliates" which increased by $1,361,000 from a use
of $244,000 during the six months ended June 30,1997, to a source of $1,117,000
during the six months ended June 30, 1998 and an increase in other liabilities
from $2,000 during the six months ended June 30, 1997 to $1,152,000 during the
six months ended June 30, 1998.
The Company used $80,460,000 and $17,839,000 through investing
activities during the six months ended June 30, 1998 and 1997, respectively. The
increased use of funds of $62,621,000 was due primarily to: (i) the purchase of
26 motel properties from Amerihost for $62,200,000, (ii) a decrease in principal
collected on loans of $2,565,000 (primarily due to loan prepayments) during the
six months ended June 30, 1998 compared to the six months ended June 30, 1997.
This increased use of funds was partially offset by (a) a decrease of $1,071,000
in loans funded during the six months ended June 30, 1998 compared to the six
months ended June 30, 1997, and (b) by an increase in the source of funds
provided by restricted investments.
The Company provided $72,992,000 and used $4,172,000 from financing
activities during the six months ended June 30, 1998 and 1997, respectively.
During the six months ended June 30, 1998 and 1997, the increased source of
funds is primarily due to the issuance of $66,100,000 loan backed fixed rate
notes under the 1998 Partnership private placement and gross borrowings of
$39,960,000 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 $664,000 from $4,735,000 during the six months
ended June 30, 1997, to $5,399,000 during the six months ended June 30, 1998.
This increase corresponds to the Company's increase in net income. Payment of
principal on notes payable increased $27,423,000 from $1,688,000 during the six
months ended June 30, 1997, to $29,111,000 during the three months ended June
30, 1998 as a result of the paydown of the revolving credit facility when the
1998 Notes were issued and the 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, 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.
At June 30, 1998, the Company had $163,000 of cash and cash equivalents
and approximately $16.6 million of total loan commitments outstanding to 24
small business concerns predominantly in the lodging industry. The weighted
average interest rate on these loan commitments at June 30, 1998 was 10.0%. Of
those commitments, approximately $5.9 million related to 17 partially funded
construction loans. Approximately $1.5 million of funding commitments remained
on six SBA 504 Program loans. These commitments are made in the ordinary course
of business and, in management's opinion, are generally on the same terms as
those to existing borrowers. These commitments to extend credit are conditioned
upon compliance with the terms of the commitment letter. Commitments
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<PAGE> 18
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").
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. 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 June 30, 1998,
the Company had $16.9 million outstanding borrowings under the credit facility
and $13.1 million available thereunder ($23.1 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 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 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 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 1996 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 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.
During 1998 the Company completed the 1998 Private Placement of
approximately $66.1 million of 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 Company's credit facility. 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%).
As a result of the above transactions, the Company is leveraged. 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".
Additionally, upon completion of the Merger, the Company will either
assume the indebtedness of Supertel or obtain outside financing. Certain of the
loan documents evidencing Supertel's indebtedness prohibit a change in control
of Supertel without the prior consent of the applicable lender. As the Merger
would constitute such a change in control, Supertel and the Company are
currently negotiating with such lenders to obtain such consent; however, there
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can be no assurance that all of such consents will be received. In the absence
of such consents, consummation of the Merger would result in a default under the
applicable loan documents which could require the Company to repay such debt
utilizing alternative sources of funds. There can be no assurance that the
Company will be able to borrow funds sufficient to repay all of such
indebtedness or, if available, that such borrowings will be on terms as
favorable to the Company as existing indebtedness.
It is anticipated that the Company would be able to refinance the
existing debt of Supertel (including any debt incurred attributable to the
payment by Supertel of any pre-merger dividend) through either: (i) the issuance
of a collateralized mortgage backed security utilizing the Supertel acquired
hotels and the Amerihost Properties or the issuance of medium-term notes
payable.
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.
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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 14,
1998, the following members were elected to the Board of Trust
Managers:
Andrew S. Rosemore
Lance B. Rosemore
Irving Munn
Roy H. Greenberg
Nathan Cohen
Martha Greenberg
Ira Silver
The following proposal was approved at the Company's Annual
Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----------- -------- ------------
<S> <C> <C> <C>
To ratify the appointment of PricewaterhouseCoopers 5,621,081 12,049 45,509
LLP as the independent public accountants of the
Company
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
A. Exhibits
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 3,
1998, by and between PMC Commercial Trust and
Supertel Hospitality, Inc. (filed as Exhibit 2.1
to PMC Commercial Trust's Form 8-K, filed June 5,
1998 (the "Form 8-K") and incorporated herein by
reference).
2.2 Agreement of Purchase and Sale, dated as of May
21, 1998, by and among various corporations
identified on Exhibit "A" thereto (filed as
Exhibit 2.2 to the Form 8-K and incorporated
herein by reference).
10.1 Master Lease Agreement, dated as of June 3, 1998,
by and between PMC Commercial Trust and Norfolk
Hospitality Management Co. (filed as Exhibit 10.1
to the Form 8-K and incorporated herein by
reference).
27.1 Financial Data Schedule
B. Forms 8-K
A Report on Form 8-K was filed with the
Securities and Exchange Commission on June 5,
1998, reporting information regarding the signing
of the Agreement and Plan of Merger with Supertel
Hospitality, Inc. relating to the proposed
acquisition of 62 motel properties pursuant to a
merger between PMC Commercial Trust and Supertel
Hospitality, Inc. and the signing of an Agreement
of Purchase and Sale relating to the sale and
leaseback of up to 30 motel properties from
Amerihost Properties, Inc.
</TABLE>
18
<PAGE> 21
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: 08/13/98 \s\ LANCE B. ROSEMORE
-------------------- ----------------------------
Lance B. Rosemore
President
Date: 08/13/98 \s\ Barry N. Berlin
-------------------- ----------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
19
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 3,
1998, by and between PMC Commercial Trust and
Supertel Hospitality, Inc. (filed as Exhibit 2.1
to PMC Commercial Trust's Form 8-K, filed June 5,
1998 (the "Form 8-K") and incorporated herein by
reference).
2.2 Agreement of Purchase and Sale, dated as of May
21, 1998, by and among various corporations
identified on Exhibit "A" thereto (filed as
Exhibit 2.2 to the Form 8-K and incorporated
herein by reference).
10.1 Master Lease Agreement, dated as of June 3, 1998,
by and between PMC Commercial Trust and Norfolk
Hospitality Management Co. (filed as Exhibit 10.1
to the Form 8-K and incorporated herein by
reference).
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FORM 10-Q OF THE PMC COMMERCIAL TRUST AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10
<SECURITIES> 153
<RECEIVABLES> 125,333<F1>
<ALLOWANCES> (80)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,731
<DEPRECIATION> 0
<TOTAL-ASSETS> 197,126<F2>
<CURRENT-LIABILITIES> 8,293<F3>
<BONDS> 95,671
0
0
<COMMON> 94,003
<OTHER-SE> (841)
<TOTAL-LIABILITY-AND-EQUITY> 197,126
<SALES> 0
<TOTAL-REVENUES> 7,177
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 895
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 899
<INCOME-PRETAX> 5,363
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,363
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<FN>
<F1>INCLUDES CURRENT AND LONG-TERM PORTION OF ALL LOANS RECEIVABLE - BEFORE RESERVE
AND RELATED INTEREST RECEIVABLE.
<F2>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE:
(i) OTHER ASSETS, NET $ 262
(ii) DEFERRED BORROWING COSTS 813
(iii) RESTRICTED INVESTMENTS 7,904
-------
$ 8,979
=======
<F3>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE:
(i) DIVIDENDS PAYABLE $2,864
(ii) OTHER LIABILITIES 1,345
(iii) INTEREST PAYABLE 236
(iv) BORROWER ADVANCES 1,521
(v) UNEARNED COMMITMENT FEES 817
(vi) DUE TO AFFILIATES 1,461
(vii) UNEARNED CONSTRUCTION
MONITORING FEES 49
------
$8,293
======
</FN>
</TABLE>
