<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 March 31, 1999
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
-------
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 May 3, 1999, Registrant had outstanding 6,526,853 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> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 2
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
</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>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS:
Loans receivable, net .............................................. $ 121,278 $ 119,712
Real estate investments, net ....................................... 72,288 61,774
Restricted investments ............................................. 11,145 13,290
Cash equivalents ................................................... 137 202
------------- -------------
TOTAL INVESTMENTS .................................................... 204,848 194,978
------------- -------------
Other assets:
Cash ............................................................... 114 23
Interest receivable ................................................ 669 786
Deferred borrowing costs, net ...................................... 548 637
Other assets, net .................................................. 241 266
------------- -------------
TOTAL OTHER ASSETS ................................................... 1,572 1,712
------------- -------------
TOTAL ASSETS ......................................................... $ 206,420 $ 196,690
============= =============
LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Loan-backed, fixed-rate notes payable .............................. $ 60,142 $ 66,852
Revolving credit facility and other notes payable .................. 46,060 28,535
Dividends payable .................................................. 3,001 2,967
Due to affiliates .................................................. 629 1,232
Borrower advances .................................................. 470 788
Unearned commitment fees ........................................... 574 558
Interest payable ................................................... 380 494
Other liabilities .................................................. 2,084 1,827
------------- -------------
TOTAL LIABILITIES .................................................... 113,340 103,253
------------- -------------
Commitments and contingencies
BENEFICIARIES' EQUITY:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value; 6,523,311
and 6,520,037 shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively ........................... 65 65
Additional paid-in capital ......................................... 94,155 94,102
Cumulative net income .............................................. 39,639 37,048
Cumulative dividends ............................................... (40,779) (37,778)
------------- -------------
Total beneficiaries' equity .......................................... 93,080 93,437
------------- -------------
TOTAL LIABILITIES AND BENEFICIARIES' EQUITY .......................... $ 206,420 $ 196,690
============= =============
Net asset value per share ............................................ $ 14.27 $ 14.33
============= =============
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
REVENUES:
Interest income - loans ........................ $ 3,265 $ 3,083
Lease income ................................... 1,685 --
Interest and dividends - other investments ..... 77 65
Other income ................................... 262 356
---------- ----------
TOTAL REVENUES ................................... 5,289 3,504
---------- ----------
EXPENSES:
Interest ....................................... 1,593 405
Advisory and servicing fees to affiliate, net .. 532 381
Depreciation ................................... 488 --
General and administrative ..................... 38 32
Legal and accounting fees ...................... 47 21
Provision for loan losses ...................... -- 10
---------- ----------
TOTAL EXPENSES ................................... 2,698 849
---------- ----------
NET INCOME ....................................... $ 2,591 $ 2,655
========== ==========
Basic weighted average shares outstanding ........ 6,523 6,454
========== ==========
Diluted weighted average shares outstanding ...... 6,524 6,462
========== ==========
Basic and diluted earnings per share ............. $ 0.40 $ 0.41
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 2,591 $ 2,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................ 488 --
Accretion of discount and fees .............................. (127) (138)
Amortization of organization and borrowing costs ............ 89 76
Provision for loan losses ................................... -- 10
Commitment fees collected, net .............................. 57 203
Construction monitoring fees collected, net ................. 11 15
Changes in operating assets and liabilities:
Accrued interest receivable ............................. 117 (28)
Other assets ............................................ 25 (36)
Interest payable ........................................ (114) (28)
Borrower advances ....................................... (318) 80
Due to affiliates ....................................... (603) 430
Other liabilities ....................................... 257 26
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 2,473 3,265
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded .................................................... (7,061) (9,437)
Principal collected ............................................. 5,570 5,145
Purchase of real estate ......................................... (4,076) --
Release of restricted investments, net .......................... 2,145 4,259
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ............................. (3,422) (33)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ........................ 53 2,072
Payment of principal on loan-backed, fixed-rate notes payable .. (6,710) (1,967)
Proceeds from revolving credit facility, net ................... 10,599 --
Payment of dividends ........................................... (2,967) (2,624)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............... 975 (2,519)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................... 26 713
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................... 225 36
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 251 $ 749
========== ==========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested ........................................... $ 53 $ 125
========== ==========
Dividends declared, not paid ................................... $ 3,001 $ 2,830
========== ==========
Interest paid .................................................. $ 1,707 $ 358
========== ==========
Assets purchased with assumed debt ............................. $ 6,926 $ --
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE> 7
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, with PMC Commercial, the
"Company") as of March 31, 1999 and the consolidated statements of income and
cash flows for the three months ended March 31, 1999 and 1998 have not been
audited by independent accountants. In the opinion of the Company's management,
the financial statements reflect all adjustments necessary to present fairly the
Company's financial position at March 31, 1999, and the results of operations
and cash flows for the three months ended March 31, 1999 and 1998. 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 1998 Annual Report on
Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The results for the three months ended March 31, 1999 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 7).
NOTE 4. REAL ESTATE INVESTMENTS
Real estate investments are 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.
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 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
5
<PAGE> 8
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REAL ESTATE INVESTMENTS (CONTINUED)
circumstances indicating impairment of any of its real estate investments. Real
estate investments consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land ....................................... $ 7,944 $ 6,900
Buildings and Improvements ................. 60,307 51,126
Furniture, Fixtures and Equipment .......... 5,502 4,724
---------- ----------
73,753 62,750
Accumulated Depreciation ................... (1,465) (976)
---------- ----------
Real estate investments, net ............... $ 72,288 $ 61,774
========== ==========
</TABLE>
NOTE 5. DIVIDENDS TO BENEFICIARIES
During January 1999, the Company paid $0.455 per share in dividends to
common shareholders of record on December 31, 1998. During March 1999, the
Company declared a $0.46 per share dividend to common shareholders of record on
March 31, 1999 which was paid on April 12, 1999.
NOTE 6. RELATED PARTY TRANSACTIONS
The loans of the Company are managed by PMC Advisers, Ltd. and it
subsidiaries (together, "PMC Advisers") pursuant to the Investment Management
Agreement (the "IMA") and property acquisitions, including the Acquired
Amerihost Properties, are supervised pursuant to a separate agreement with PMC
Advisers entered into in June 1998 (the "Lease Supervision Agreement" and
together with the IMA the "IMAs").
Pursuant to the IMA, fees between 0.875% and 1.67%, annually, are
charged to the Company based upon the average principal outstanding of the
Company's loans. In addition, during 1996, the initial IMA was amended to
include compensation to PMC Advisers for its assistance in the issuance of the
Company's debt and equity securities. During 1998, a second IMA was entered into
which provides a fee to be paid to PMC Advisers for providing services relating
to the Amerihost leases and charged a fee relating to the acquisition of the
Amerihost Properties of 0.75% of the acquisition cost. The Company is required
to pay an annual fee (the "Lease Supervision Fee") of 0.70% of the cost of the
Amerihost Properties ($73.0 million). As of April 1, 1999, the annual fee will
be approximately $511,000.
6
<PAGE> 9
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
Fees associated with the IMAs consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total fees incurred ........................ $ 641 $ 422
Less: Capitalized as cost of
originating loans ................. (28) (41)
Capitalized as cost of property
acquisitions ...................... (81) --
---------- ----------
Investment management fee expense .......... $ 532 $ 381
========== ==========
</TABLE>
NOTE 7. NOTES PAYABLE
The Company has a revolving credit facility which provides funds to
originate loans collateralized by commercial real estate up to the lesser of
$45 million or an amount equal to the sum of (i) 50% of the value of the
underlying property collateralizing the borrowings plus (ii) through June 30,
1999, 40% of the value of the Company's owned properties. For calculation
purposes, the portion of the credit availability relating to the Company's owned
properties (see (ii) above) is limited to $20 million. At March 31, 1999, the
Company had $39.1 million in debt outstanding under the credit facility with
availability of an additional $5.9 million. At March 31, 1998, the Company had
$3.8 million outstanding under the credit facility with availability of an
additional $28.7 million. The Company is charged interest on the balance
outstanding under the credit facility, at the option of the Company, at either
the prime rate of the lender less 50 basis points or 175 basis points over the
30, 60 or 90 day LIBOR. At March 31, 1999, the weighted average interest rate on
short-term borrowings under the revolving credit facility was approximately
7.0%. The credit facility requires the Company to meet certain covenants, the
most restrictive of which provides that the ratio of senior debt to net worth
(as defined in the credit facility) will not exceed 2.0 times. At March 31, 1999
the Company was in compliance with all covenants of this facility. The facility
matures on March 31, 2000 except for $15 million borrowed which matures June 30,
1999.
In March 1996, PMC Commercial Receivable Limited Partnership, a Delaware
limited partnership (the "1996 Partnership"), completed a private placement (the
"1996 Private Placement") of its $29,500,000 of Fixed Rate Loan Backed Notes,
Series 1996-1 (the "1996 Notes"). In connection with the 1996 Private Placement,
the 1996 Notes were given a rating of "AA" by Duff & Phelps Credit Rating Co.
The Company owns, directly or indirectly, all of the interests of the 1996
Partnership. The 1996 Notes, issued at par, have a stated maturity in 2016, bear
interest at the rate of 6.72% per annum, and were collateralized by an initial
amount of approximately $39.7 million of loans contributed by the Company to the
1996 Partnership. At March 31, 1999, approximately $10.9 million of those loans
remained outstanding. The Company, through PMC Advisers, services the loans sold
to the 1996 Partnership. The Company has no obligation to pay the 1996 Notes nor
do the holders of the 1996 Notes have any recourse against the assets of the
Company. Accordingly, if the 1996 Partnership fails to pay the 1996 Notes, the
sole recourse of the holders of the 1996 Notes is against the assets of the 1996
Partnership. The net proceeds from the issuance of the 1996 Notes (approximately
$27.1 million after giving effect to costs of $450,000 and a $1.9 million
initial reserve deposit held by the trustee as collateral) were distributed to
the Company in accordance with its interest in the 1996 Partnership. The 1996
Partnership's assets consist solely of the loans acquired from the Company, and
funds held in collateral accounts related to collections on the loans and a
required cash reserve account. The 1996 Partnership conducts no business
activity other than to make periodic principal and interest payments on the
outstanding 1996 Notes. The aggregate principal amount of the 1996 Notes
outstanding at March 31, 1999 was $4.5 million. All principal collected on the
underlying
7
<PAGE> 10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES PAYABLE (CONTINUED)
loans during the monthly period (as defined in the Trust Indenture) are used to
make the required principal payment on the first business day of the following
month.
In June 1998, PMC Commercial Trust, Ltd. 1998-1, a Delaware
limited partnership (the "1998 Partnership") completed a private placement (the
"1998 Private Placement") of its $66,100,000 of Fixed Rate Loan Backed Notes,
Series 1998-1 (the "1998 Notes"). In connection with this transaction, the 1998
Notes were given a rating of "Aaa" by Moody's Investors Service, Inc. The
Company owns, directly or indirectly, all of the interests in the 1998
Partnership. The 1998 Notes, issued at par, have a stated maturity of May 1,
2019, bear interest at the rate of 6.37% per annum, and were collateralized by
an initial amount of approximately $71.9 million of loans contributed by the
Company to the 1998 Partnership. At March 31, 1999, approximately $60.4 million
of those loans remained outstanding. The Company, through PMC Advisers, services
the loans sold to the 1998 Partnership. The Company 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. 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 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 Amerihost properties. The 1998 Partnership's assets consist solely of the
loans acquired from the Company, and funds held in collateral accounts related
to collections on the loans and a required cash reserve account. The 1998
Partnership conducts no business activity other than to make periodic principal
and interest payments on the outstanding 1998 Notes. The aggregate principal
amount of the 1998 Notes outstanding at March 31, 1999 was $55.7 million. All
principal collected on the underlying loans during the monthly period (as
defined in the March 31, 1999 Trust Indenture) are used to make the required
principal payment on the first business day of the following month.
The Company receives distributions from the 1996 Partnership and 1998
Partnership. Pursuant to the Company's charter, distributions of the net assets
of the Company's wholly-owned subsidiaries are limited. As of March 31, 1999,
the dividends available for distribution from the 1996 Partnership and the 1998
Partnership were approximately $175,000 and $305,000, respectively, which were
distributed to the Company in April 1999.
NOTE 8. NET INCOME PER SHARE
The weighted average number of common shares of beneficial interest
outstanding were 6,523,057 and 6,454,344 for the three months ended March 31,
1999 and 1998, respectively. For purposes of calculating diluted earnings per
share, the weighted average shares outstanding were increased by approximately
887 and 8,011 for the effect of stock options for the three months ended March
31, 1999 and 1998, respectively.
NOTE 9. PROPERTY ACQUISITION
During March 1999, the Company acquired four hospitality properties
(the "Four Amerihost Properties") for an aggregate purchase price of $10.8
million. The Company has assumed debt related to the Four Amerihost Properties
that aggregates $6.9 million with a weighted average interest rate of 8.0%. This
debt is amortized over a 20-year period and has remaining maturities of between
15 and 20 years. The debt assumed has restrictive provisions, which provide
substantial penalties if paid prior to maturity. Pursuant to the sale/leaseback
agreement, the Company leases the Four 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, and with consumer price index ("CPI")
increases up to a maximum of two percent per year beginning after the third
year. The aggregate amount of the lease payments to be received by the Company
for the Four Amerihost Properties is $1.1 million per year, subject to CPI
increases described above. Accordingly, the aggregate Base Rent payment for the
30 acquired Amerihost properties has increased to $7.3 million
8
<PAGE> 11
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. PROPERTY ACQUISITION (CONTINUED)
per year subject to the CPI increases as described above, plus 2% of the gross
room revenues as defined in the master lease agreement.
NOTE 10. COMMITMENTS AND CONTINGENCIES:
Commitments to extend credit are agreements to lend to a customer provided
the terms established in the contract are met. The Company had approximately
$17.2 million of loan commitments and approvals outstanding to 17 corporations,
partnership or individuals predominantly in the lodging industry at March 31,
1999. The weighted average contractual interest rate on these loan commitments
at March 31, 1999 was 9.5%. Of the total loan commitments and approvals, the
Company had approximately $8.8 million of loan commitments outstanding on nine
partially funded construction loans and one loan approval of approximately $1.6
million at March 31, 1999. The above commitments are made in the ordinary course
of business and in management's opinion, are generally on the same terms as
those to existing borrowers. Commitments generally have fixed expiration dates
and require payment of a fee. Since some commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Pursuant to the IMA, should the Company not
have funds available for commitments, such commitments will be referred to
affiliated entities.
In the normal course of business, the Company is subject to various
proceedings and claims, the resolution of which will not, in management's
opinion, have a material adverse effect on the Company's financial position or
results of operations.
At March 31, 1999, the Company has approximately $5 million available
under the $45 million revolving credit facility which matures March 31, 2000;
$15 million of the facility presently matures on September 30, 1999. As
described above, to the extent the Company does not have available funds for
commitments, such commitments will be referred to affiliated entities. The
Company has entered into mortgage commitments with 6 banks to provide $8.6
million in mortgages related to 6 Amerihost properties and expects to receive
approximately $1 million on SBA Section 504 loan principal takeouts. Principal
collections including prepayments of the Parent Company's loans would also
provide an available source of funds. The Company has commenced discussions with
the bank to increase the revolving credit facility to $60 million. The Company
has also commenced evaluation of between 12-15 of its Amerihost properties for
inclusion in a debt security and is developing a loan pool of approximately $40
million to $50 million for a securitization transaction. The Company expects to
increase the availability under its revolving credit facility. However there can
be no assurances that the Company will be able to do so. If the bank is
unwilling to extend the maturity date of the Revolver and the other sources of
capital described above are not available at acceptable advance rates and/or
interest rates, the Company may have to refer commitments to PMC Advisers, issue
debt at decreased loan-to-value ratios or increased interest rates and/or sell
assets in order to cause the revolving credit facility to be reduced to $30
million.
NOTE 11. BUSINESS SEGMENTS:
Operating results and other financial data are presented for the
principal business segments of the Company for the three months ended March 31,
1999. These segments are categorized by line of business which also corresponds
to how they are operated. The segments include (i) the Lending Division, which
primarily originates loans to small business enterprises, primarily in the
lodging industry and (ii) the Property Division which owns commercial properties
in the lodging industry. Until June 30, 1998, the Company's business activities
consisted solely of the Lending Division.
9
<PAGE> 12
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. BUSINESS SEGMENTS: (CONTINUED)
The Company's business segment data for the three months ended March
31, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------
LENDING PROPERTY
TOTAL DIVISION DIVISION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Interest income - loans and other .. $ 3,604 $ 3,604 $ --
Lease income ....................... 1,685 -- 1,685
------------- ------------- -------------
Total ........................... 5,289 3,604 1,685
------------- ------------- -------------
Expenses:
Interest(1) ........................ 1,593 1,025 568
Advisory and servicing fees ........ 532 424 108
Depreciation ....................... 488 -- 488
Other .............................. 85 85 --
------------- ------------- -------------
Total ........................... 2,698 1,534 1,164
------------- ------------- -------------
Net income ........................... $ 2,591 $ 2,070 $ 521
============= ============= =============
Total assets by division ............. $ 206,380 $ 132,817 $ 73,563
============= ============= =============
</TABLE>
(1) The Company allocates interest expense based on the relative total assets
of each division.
10
<PAGE> 13
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
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 the real estate of the
related business. The Company's lending function consists primarily of making
loans to borrowers who operate in the lodging industry. During the three months
ended March 31, 1999 and the years ended December 31, 1998 and 1997, the Company
originated and funded $7.1 million, $43.0 million and $43.1 million of loans. A
substantial portion of these loan originations were to corporations and
individuals in the lodging industry. The Company anticipates the dollar amount
of loans to be originated in 1999 will be less than originations during each of
the previous two years. During March 1999, the Company completed the acquisition
of four motel properties (the "Four Amerihost Properties" and, collectively with
the Amerihost properties previously acquired, the "Amerihost Properties") from
Amerihost Properties, Inc. or its subsidiaries ("Amerihost") for $10.8 million.
This acquisition completes the transaction with Amerihost under the agreement
with Amerihost, dated May 21, 1998, pursuant to which the Company agreed to
acquire 30 Amerihost Properties in a sale/leaseback transaction. Amerihost
Properties, Inc. is a public entity that files periodic reports with the
Securities and Exchange Commission ("SEC") Additional information about
Amerihost can be obtained from the SEC's website at http://www.sec.gov. The
Company will continue to attempt to enhance shareholder value by increasing its
loan portfolio and making strategic acquisitions of commercial properties.
As of March 31, 1999, the Company's total loan portfolio outstanding
was $123.1 million ($121.3 million after reductions for loans purchased at a
discount, deferred commitment fees and loan loss reserves) with a weighted
average contractual interest rate of approximately 10.2%. The weighted average
contractual interest rate does not include the effects of the amortization of
discount on purchased loans, commitment fees on funded loans or prepayment fees
earned. The annualized average yields on loans, including all loan fees and
prepayment fees earned, for the three months ended March 31, 1999 and the years
ended December 31, 1998 and 1997 were approximately 11.3%, 13.1% and 12.4%,
respectively.
As of March 31, 1999, the Company had one loan that was greater than 31
days delinquent. In addition, the Company has established a reserve in the
amount of $100,000 against a loan that management has determined to be a
potential "problem loan" since the borrower has lost his franchise affiliation.
The aggregate principal balance outstanding of the "problem loan" at March 31,
1999 was approximately $1,014,000 and the borrower was current on all loan
payments as of March 31, 1999. In the event such loan is required to be
liquidated, management estimates the collateral will equal or exceed the
principal balance outstanding less the related reserve.
LOAN PREPAYMENT CONSIDERATIONS
The terms of the loans originated by the Company generally provide
that voluntary prepayments of principal of the loans (each, a "Principal
Prepayment") are permitted, subject to a yield maintenance charge (a "Yield
Maintenance Charge"). The Yield Maintenance Charge 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.
11
<PAGE> 14
INTEREST RATE AND PREPAYMENT RISK
The ability of the Company to achieve certain of its investment
objectives will depend in part on its ability to borrow funds or issue preferred
shares of beneficial interest ("Preferred Shares") 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) and the lease revenues on owned properties. During
periods of changing interest rates, interest rate mismatches could negatively
impact the Company's net income, dividend yield, and the market price of the
Company's 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 current levels. 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.
PROPERTY ACQUISITION
The following tables show statistical data regarding all 30 Amerihost
Properties owned by the Company and leased to Amerihost Inns:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------- % INCREASE
1999 (1) 1998 (1) DECREASE
-------------- ------------- ----------
<S> <C> <C> <C>
Occupancy 51.77% 49.76% 4%
ADR (2) $ 53.65 $ 51.68 4%
RevPAR (3) 27.78 25.72 8%
</TABLE>
(1) The tables show financial and statistical data of the properties
for the years presented which includes periods prior to the date
the Company acquired the properties. Room revenue was $4,580,000
and $4,098,000 for the three months ended March 31, 1999 and
1998, respectively (an 11% increase). The increase in revenue for
the three months ended March 31, 1999, when compared to the three
months ended March 31, 1998, is due partially to construction of
additional properties. Total available rooms increased from
159,379 during the three months ended March 31, 1998 to 164,856
during the three months ended March 31, 1999 (a 3% increase). All
data has been provided by Amerihost.
(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.
CERTAIN ACCOUNTING CONSIDERATIONS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") 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 Company's Board of Trust Managers
when significant doubt exists as to the ultimate realization of the loan. As of
March 31, 1999, a $100,000 loan loss reserve has been established. The
12
<PAGE> 15
determination of whether significant doubt exists and whether a loan loss
provision is necessary for each loan requires judgement and considers the facts
and circumstances existing at the evaluation date. Changes to the facts and
circumstances of the borrower, the lodging industry and the economy may require
the establishment of significant additional loan loss reserves. If a
determination is made that there exists significant doubt as to the ultimate
collection of a loan, the effect to operating results may be material.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
The net income of the Company during the three months ended March 31,
1999 and 1998, was $2,591,000 and $2,655,000, or $0.40 and $0.41 per share,
respectively. The basic weighted average shares outstanding increased by
approximately 1% from 6,454,000 for the three months ended March 31, 1998 to
6,523,000 for the three months ended March 31, 1999 as a result of shares issued
pursuant to the dividend reinvestment and cash purchase plan. Revenues of the
Company increased by $1,785,000, or 51%, from $3,504,000 during the three months
ended March 31, 1998 to $5,289,000 during the three months ended March 31, 1999
due primarily to the lease revenue on owned properties commencing June 1998.
Equity ownership in properties, while causing increased revenues also causes
increased expenses (primarily depreciation, interest costs and advisory fees).
INTEREST INCOME - LOANS increased by $182,000 (6%), from $3,083,000
during the three months ended March 31, 1998, to $3,265,000 during the three
months ended March 31, 1999. 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. This $182,000 increase in
interest income-loans was primarily attributable to the increase in the
Company's outstanding loan portfolio during the three months ended March 31,
1999 resulting from 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 $11.1 million (10%),
from $112.0 million during the three months ended March 31, 1998, to $122.8
million during the three months ended March 31, 1999.
LEASE INCOME was $1.7 million during the three months ended March 31,
1999. The Company had no lease income in the first quarter of 1998. This amount
is attributable to the lease payments received on the Amerihost Properties
acquired by the Company during June 1998 and March 1999, pursuant to the
sale/leaseback agreements.
INTEREST AND DIVIDENDS - OTHER INVESTMENTS increased by $12,000 (18%)
from $65,000 during the three months ended March 31, 1998, to $77,000 during the
three months ended March 31, 1999. The average short-term investments of the
Company increased by $1.9 million, from $5.3 million during the three months
ended March 31, 1998, to $7.2 million during the three months ended March 31,
1999. This increase in average short-term investments is attributable to the
restricted investments related to the secured financing completed in June 1998.
There were no related investments during the three months ended March 31, 1998.
The average yields on short-term investments during the three months ended March
31, 1999 and 1998 were approximately 4.1% and 4.9%, respectively.
OTHER INCOME decreased by $94,000 (26%), from $356,000 during the three
months ended March 31, 1998, to $262,000 during the three months ended March 31,
1999. Other income consists of: (i) prepayment fees, (ii) amortization of
construction monitoring 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. The decrease was principally attributable to
the collection of prepayment fees during the three months ended March 31, 1999
of $194,000 compared to $252,000 during the three months ended March 31, 1998.
During the three months ended March 31, 1999 and 1998, four and three loans in
the amount of approximately -$3.6 million during both periods, paid in full.
Prepayment fee income as a percentage of loans paid in full was less during the
three months ended March 31, 1999 than during the three months ended March 31,
1998 due to one loan, paid in full during the three months ended March 31, 1999,
not having a Yield Maintenance Premium. Prepayment fees result in one-time
increases in the Company's other income, but will result in a long-term
reduction in income if 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 loans which were prepaid. Prepayments generally increase during times
of declining interest rates. While the Company anticipates loan prepayments for
the remainder of 1999 will be in amounts comparable to or
13
<PAGE> 16
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 rate. This
apparent willingness, coupled with the increased lending competition, could
result in higher than anticipated prepayments. See "-- Loan Prepayment
Considerations" and "-- Interest Rate and Prepayment Risk." In addition to the
above, the decline in other income is a result of income recognized from other
loan-related fees, such as assumption, modification and extension fees,
decreasing by $54,000 from $89,000 during the three months ended March 31, 1998,
to $35,000 during the three months ended March 31, 1999.
INTEREST EXPENSE increased by $1,188,000 (293%) from $405,000 during
the three months ended March 31, 1998 to $1,593,000 during the three months
ended March 31, 1999. The increase was primarily a result of the issuance of the
1998 Notes used to purchase the Amerihost Properties and borrowings pursuant to
the Company's revolving credit facility used to originate loans. Interest
expense during the three months ended March 31, 1999 consisted primarily of
interest incurred on the 1996 Notes issued pursuant to the 1996 Private
Placement (approximately $76,000), the 1998 Notes issued pursuant to the 1998
Private Placement (approximately $880,000), and the revolving credit facility
(approximately $587,000). During the three months ended March 31, 1998, interest
expense consisted of interest incurred on the 1996 Notes issued pursuant to the
1996 Private Placement (approximately $334,000) and interest on the revolving
credit facility (approximately $62,000).
EXPENSES, OTHER THAN INTEREST EXPENSE, consist primarily of the
servicing and advisory fees paid to PMC Advisers pursuant to an investment
management agreement ("IMA") and depreciation related to the Amerihost
Properties. Pursuant to the IMA, fees between 0.875% and 1.67% annually are
charged to the Company based upon the average principal outstanding of the
Company's loans. While PMC Advisers bears substantially all of the costs
associated with the Company's operations, the Company does pay certain expenses,
including, direct transaction costs incident to the acquisition and disposition
of investments, legal and auditing fees and expenses, the fees and expenses of
trust managers not affiliated with the Company ("Independent Trust Managers"),
the costs of printing and mailing proxies and reports to shareholders and the
fees and expenses of the Company's custodian and transfer agent. The Company,
rather than PMC Advisers, is also required to pay expenses associated with any
litigation and other extraordinary or nonrecurring expenses.
In addition, the Company and PMC Advisers entered into a separate
agreement relating to the supervision of the sale leaseback agreements between
the Company and Amerihost (the "Lease Supervision Agreement" and together with
the IMA, the "IMAs"). The Company is required to pay an annual fee (the "Lease
Supervision Fee") of 0.70% of the cost of the Amerihost Properties ($73.0
million). As of April 1, 1999, the Lease Supervision Fee will be approximately
$511,000. In the event the Lease Supervision Agreement with PMC Advisers is
terminated or not renewed by PMC Commercial (other than as a result of a
material breach by PMC Advisers) or by PMC Advisers (as a result of a material
breach by PMC Commercial), PMC Advisers would be entitled to receive the
Amerihost Fee for a period of five years from the termination date.
Pursuant to the IMAs, the Company incurred an aggregate of
approximately $641,000 in management fees for the three months ended March 31,
1999 including approximately $108,000 for the Lease Supervision Fee. Of the
total management fees paid or payable to PMC Advisers during the three months
ended March 31, 1999, $28,000 has been offset against commitment fees as a
direct cost of originating loans and $81,000 of fees charged related to the
acquisition of the Four Amerihost Properties were capitalized as a cost of the
properties. Investment management fees were approximately $422,000 for the three
months ended March 31, 1998. Of the total management fees paid or payable to PMC
Advisers during the three months ended March 31, 1998, $41,500 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
$422,000 during the three months ended March 31, 1998 to $451,000 during the
three months ended March 31, 1999, an increase of $29,000, or 7%, (prior to
offsetting direct costs related to the origination of loans), is primarily due
to increases in the Company's loans and increases in common equity capital,
including additional paid-in capital. The average outstanding loans as defined
by the IMA increased by $7.6 million (7%), from $112.9 million during the three
months ended March 31, 1998, to $120.5 million during the three months ended
March 31, 1999. The average common equity capital as defined in the IMA
increased by $1.4 million (2%), from $92.8 million during the three months ended
March 31, 1998, to $94.2 million during the three months ended March 31, 1999.
14
<PAGE> 17
DEPRECIATION EXPENSE was $488,000 during the three months ended March
31, 1999. This amount is attributable to depreciation of the Amerihost
Properties acquired by the Company on June 30, 1998 and during March 1999,
pursuant to the sale/leaseback agreement.
GENERAL AND ADMINISTRATIVE EXPENSES increased by $6,000 (19%), from
$32,000 during the three months ended March 31, 1998, to $38,000 during the
three months ended March 31, 1999. The general and administrative expenses
remained at low levels and stable since the majority of the expenses are payable
by PMC Advisers pursuant to the IMA.
LEGAL AND ACCOUNTING FEES increased by $26,000 (124%), from $21,000
during the three months ended March 31, 1998, to $47,000 during the three months
ended March 31, 1998. This increase is partially attributable to an increase in
corporate activity when comparing the three months ended March 31, 1999 to the
three months ended March 31, 1998.
As the Company is currently qualified as a real estate investment trust
under the applicable provisions of the Internal Revenue Code of 1986, as
amended, there are no provisions in the financial statements for Federal income
taxes.
CASH FLOW ANALYSIS
The Company generated $2,473,000 and $3,265,000 from operating
activities during the three months ended March 31, 1999 and 1998, respectively.
The primary source of funds is the net income of the Company. The decrease of
$792,000 (24%) was primarily due to several factors including (i) the change
related to "Due to affiliates" which decreased by $1,033,000 from a source of
$430,000 during the three months ended March 31,1998, to a use of $603,000
during the three months ended March 31, 1999, (ii) fluctuations in borrower
advances which decreased by $398,000 from a source of $80,000 during the three
months ended March 31, 1998, to a use of $318,000 during the three months ended
March 31, 1999, and (iii) the decrease in net income of $64,000 from $2,655,000
during the three months ended March 31, 1998 to $2,591,000 during the three
months ended March 31 1999. This decrease in funds was partially offset by (i)
depreciation of $488,000 and (ii) the change related to "other liabilities"
which increased by $231,000 from a source of $26,000 during the three months
ended March 31,1998, to a source of $257,000 during the three months ended March
31, 1999. The increase in other liabilities is primarily due to deposits, held
by the Company for Amerihost, pursuant to the sale/leaseback agreement. The
Company held no such deposits at March 31, 1998.
The Company used $3,422,000 and $33,000 in cash through investing
activities during the three months ended March 31, 1999 and 1998, respectively.
The increased use of funds of $3,389,000 was due to; (i) the purchase of the
remaining Four Amerihost Properties for $4,076,000 (net of $6,926,000 of assumed
debt) and (ii) a decrease of $2,145,000 in the source of funds provided by
restricted investments during the three months ended March 31, 1999 compared to
the three months ended March 31, 1998. The increased use of funds was offset by
a decrease of $2,376,000 in loans funded during the three months ended March 31,
1999 compared to the three months ended March 31, 1998.
The Company had a net source of funds of $975,000 and a net use of
funds of $2,519,000 from financing activities during the three months ended
March 31, 1999 and 1998, respectively. During the three months ended March 31,
1999 the Company increased its borrowings under its revolving credit facility by
$10,600,000 primarily to fund its purchase of the Four Amerihost Properties and
to fund increases in the loan portfolio. 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 $343,000 from $2,624,000 during the three months ended March 31,
1998, to $2,967,000 during the three months ended March 31, 1999. These dividend
increases correspond to the increases in the Company's funds from operations.
The payment of principal on notes payable increased by $4.7 million from $2.0
million during the three months ended March 31, 1998 to $6.7 million during the
three months ended March 31, 1999, resulting from an increase in collections on
the underlying notes receivable.
15
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans and to
acquire commercial real estate. 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.
As a REIT, the Company must distribute to its shareholders at least 95%
of its taxable income to maintain its tax-free status under the Code. As a
result, the Company's earnings will not be available to fund investments. In
order to maintain and increase the investment portfolio, the Company has a
continuing need for capital. The Company has historically met its capital needs
through borrowings under its credit facility, structured sales/financings of its
loan portfolio and the issuance of common stock. A reduction in the availability
of these sources of funds could have a material adverse effect on the Company.
The Company expects to obtain capital to fund loans through borrowings as
detailed below. An inability to obtain funds from these sources or from other
sources could have a material adverse effect on the financial condition and
results of the Company.
At March 31, 1999, the Company had $0.3 million of cash and cash
equivalents and approximately $17.2 million of total loan commitments and
approvals outstanding to 17 small business concerns predominantly in the lodging
industry. Of the total loan commitments and approvals outstanding, the Company
had approximately $8.8 million of loan commitments outstanding pertaining to
nine partially funded construction loans and one loan approval of approximately
$1.6 million at March 31, 1999. The weighted average interest rate on loan
commitments at March 31, 1999 was 9.5%. 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. Pursuant to the
IMA, if the Company does not have available capital to fund outstanding
commitments, PMC Advisers will refer such commitments to affiliates of the
Company for which the Company will receive no income.
In general, to meet its liquidity requirements, including expansion of
its outstanding loan portfolio and/or acquisition of properties, the Company
intends to use: (i) its revolving credit facility as described below, (ii)
borrowings collateralized by the properties, (iii) issuance of debt securities
including securitizations of loans or properties, (iv) placement of corporate
long-term borrowings, and/or (v) offering of additional equity securities,
including Preferred Shares. The Company believes that these financing sources
will enable the Company to generate funds sufficient to meet both its short-term
and long-term capital needs. The ability of the Company to continue its
historical growth, however, will depend on its ability to borrow funds and/or
issue equity on acceptable terms. The Company is currently pursuing financing
sources including both mortgages on individual properties and a combination of
smaller pools identified for inclusion in commercial mortgage backed securities
("CMBS"). The Amerihost Properties are relatively new and have not achieved
their optimal cash flow. Thus, the amount of leverage available through CMBS
transactions is lower than that which management believes is appropriate and/or
the cost of the related leverage is higher than management believes is
warranted. Accordingly, the Company has entered into commitments to mortgage six
of the Amerihost properties for aggregate proceeds of $8.6 million at a weighted
average interest rate of 7.5%. All of these commitments have five year
maturities and 20 year amortization periods. The Company has a revolving credit
facility (the "Revolver") providing funds to originate loans and to purchase
commercial real estate. The Revolver, as amended in March 1999, provides the
Company with credit availability up to the lesser of $45 million or an amount
equal to the sum of (a) 50% of the value of the underlying loans collateralizing
the borrowings plus (b) 40% of the value of the Company's owned properties
through June 30, 1999. For calculation purposes, the portion of the credit
availability relating to the Company's owned properties (see (b) above) is
limited to $20 million. At March 31, 1999, the Company had $39.1 million of
outstanding borrowings under the Revolver and $5.9 million available thereunder,
as amended. 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. The
facility matures on March 31, 2000 except for $15 million which matures
September 30, 1999. The Company is presently negotiating with the bank to
increase the Revolver to $60 million. Additional funds may also become available
to the Company from the proceeds of SBA 504 Program loan takeouts. Management
anticipates these sources of funds, proceeds from either the mortgage of
properties or an additional structured sale or securitization of loans and/or
properties and proceeds from loan
16
<PAGE> 19
prepayments will be adequate to meet its existing obligations. It is anticipated
that during 1999, the Company will attempt an additional structured sale or
securitization of loans and/or properties or mortgage the Amerihost Properties
for aggregate proceeds between $30 million to $60 million. There can be no
assurance the Company will be able to raise funds through these financing
sources. If these sources are not available, the Company may have to slow the
rate of increasing the outstanding loan portfolio and other investments. If the
bank is unwilling to extend the maturity date of the Revolver and the other
sources of capital described above are not available at acceptable advance rates
and/or interest rates, the Company may have to refer commitments to PMC
Advisers, issue debt at decreased loan-to-value ratios or increased interest
rates and/or sell assets in order to cause the revolving credit facility to be
reduced to $30 million.
In general, if the returns on loans originated by the Company combined
with lease payments on properties purchased 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 Risks".
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results will fluctuate based on a
number of factors. These include, among others, the completion of a leverage or
securitization transaction in a particular calendar quarter, the interest rates
on the securities issued in connection with its leverage or securitization
transactions, the volume of loans originated by the Company, the timing of
prepayment of loans, changes in and the timing of the recognition of realized
and unrealized gains or losses on investments, the degree to which the Company
encounters competition in its markets and general economic conditions. As a
result of these factors, results for any one quarter should not be relied upon
as being indicative of performance in future quarters.
IMPACT OF INFLATION
The Company does not believe that inflation materially affects its
business other than the impact that it may have on the securities markets, the
valuation of collateral underlying the loans and the relationship of the
valuations to underlying earnings. Those could all influence the value of the
Company's investments.
YEAR 2000 COMPLIANCE UPDATE
The Year 2000 issue concerns the potential impact of historic computer
software code that only utilized two digits to represent the calendar year
(e.g., "98" for "1998"). Software so developed, and not corrected, could produce
inaccurate or unpredictable results commencing upon January 1, 2000, when
current and future dates present a lower two digit year number than dates in the
prior century. The Company, similar to most financial services providers, is
subject to the potential impact of the Year 2000 issue due to the nature of
financial information. Potential impacts to the Company may arise from software,
computer hardware, and other equipment both within the Company's direct control
and outside of the Company's ownership, yet with which the Company
electronically or operationally interfaces. Regulators have intensively focused
upon Year 2000 exposures, issuing guidance concerning the responsibilities of
senior management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with these
regulatory concerns.
During 1998, the Company, through PMC Advisers, formed an internal
review team to address, identify and resolve any Year 2000 issues that
encompasses operating and administrative areas of the Company. In addition,
executive management monitors the status of the Company's Year 2000 remediation
plans, where necessary, as they relate to internally used software, computer
hardware and use of computer applications in the Company's servicing processes.
In addition, PMC Advisers is engaged in assessing the Year 2000 issue with
significant suppliers.
17
<PAGE> 20
The assessment process relating to PMC Advisers's loan receivable
servicing operations has commenced. In addition, PMC Advisers has initiated
formal communications with its significant suppliers to determine the extent to
which PMC Advisers is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company, through PMC Advisers, intends to use internal resources to
test the software for Year 2000 compliance. The Company plans to substantially
complete its Year 2000 assessment and remediation by the second quarter of 1999.
The Company will not incur any direct costs as a result of the advisory
relationship with PMC Advisers. However, based on preliminary information, the
majority of the project cost will be attributable to employee time necessary to
test the present system and to meet future industry requirements and will
accordingly be expensed. The Company has not incurred any material costs related
to the assessment of, and preliminary efforts in connection with its Year 2000
issues. The Costs of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ significantly from those plans.
Specific factors that might cause differences from management's estimates
include, but are not limited to, completion by third parties (primarily the
Company's bank) of their Year 2000 evaluations and their required modifications.
Management believes that PMC Advisers is devoting the necessary resources to
identify and resolve significant Year 2000 issues in a timely manner.
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 directly 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 completed discussion of the Company's cash flows
from operations, see "Cash Flow Analysis".
The Company's FFO for the three months ended March 31, 1999 and 1998 was
computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net Income .................................. $ 2,591 $ 2,655
Add depreciation ............................ 488 --
---------- ------------
FFO ......................................... $ 3,079 $ 2,655
========== ============
Diluted weighted average shares ............. 6,524 6,462
========== ============
</TABLE>
18
<PAGE> 21
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN 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.
19
<PAGE> 22
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in
interest rates.
The Company's balance sheet consists of two items subject to interest
rate risk. The majority of the Company's investment portfolio consists of fixed
interest rate loans. Given that the loans are priced at a fixed rate of
interest, changes in interest rates should not have a direct impact on interest
income. In addition, changes in market interest rates are not typically a
significant factor in the determination of fair value of these loans.
Significant reductions in interest rates, however, can prompt increased
prepayments of the Company's loans, resulting in possible decreases in long-term
revenues due to the relending of the prepayment proceeds at lower interest
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate and Prepayment Risk." The Company's
liabilities consist primarily of the Company's Fixed Rate Loan Backed Notes,
Series 1996-1 and Fixed Rate Loan Backed Notes, Series 1998-1 (collectively, the
"Notes") of approximately $60.1 million at March 31, 1999. The Company's Notes
are payable at fixed rates of interest, so changes in interest rates do not
affect the related interest expense. However, the Company's Revolver is subject
to adverse changes in market interest rates. Assuming interest rates increased
by 200 basis points (2%) above the present Revolver interest rate of 7.25%, on
an annualized basis, interest expense would increase by approximately $782,000
on the amount outstanding of $39.1 million at March 31, 1999.
20
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Form 8-K
None
21
<PAGE> 24
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: 5/17/99 /s/ Lance B. Rosemore
------------- -------------------------------------
Lance B. Rosemore
President
Date: 5/17/99 /s/ Barry N. Berlin
------------- -------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
22
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 114
<SECURITIES> 137
<RECEIVABLES> 122,047<F1>
<ALLOWANCES> (100)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 73,753
<DEPRECIATION> (1,465)
<TOTAL-ASSETS> 206,420<F2>
<CURRENT-LIABILITIES> 7,138<F3>
<BONDS> 106,202
0
0
<COMMON> 94,220
<OTHER-SE> (1,140)
<TOTAL-LIABILITY-AND-EQUITY> 206,420
<SALES> 5,289
<TOTAL-REVENUES> 5,289
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,593
<INCOME-PRETAX> 2,591
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,591
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<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 241
(ii) DEFFERED BORROWING COSTS 548
(iii) RESTRICTED INVESTMENTS 11,145
------
11,934
======
<F3>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE:
(i) DIVIDENDS PAYABLE 3,001
(ii) OTHER LIABILITIES 2,084
(iii) INTEREST PAYABLE 380
(iv) BORROWER ADVANCES 470
(v) UNEARNED COMMITMENT FEES 574
(vi) DUE TO AFFILIATES 629
-----
7,138
=====
</FN>
</TABLE>
