<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
18111 PRESTON ROAD, SUITE 600, DALLAS, TX 75252 (972)349-3200
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES OF BENEFICIAL INTEREST, $.01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Shares of Beneficial
Interest on February 26, 1999 as reported on the American Stock Exchange, was
approximately $92 million. Common Shares of Beneficial Interest held by each
officer and trust manager and by each person who owns 10% or more of the
outstanding Common Shares of Beneficial Interest have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 26, 1999, Registrant had outstanding 6,523,311 Common Shares of
Beneficial Interest.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after the year covered by this Form 10-K
with respect to the Annual Meeting of Shareholders to be held on May 12, 1999
are incorporated by reference into Part III.
<PAGE> 2
PMC COMMERCIAL TRUST
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form
10-K
Report
Item Page
- ---- ------
<S> <C>
PART I
1. Business .................................................................................. 1
2. Properties................................................................................. 13
3. Legal Proceedings.......................................................................... 13
4. Submission of Matters to a Vote of Security Holders........................................ 13
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters................ 14
6. Selected Consolidated Financial Data...................................................... 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 16
7A. Quantitative and Qualitative Disclosures about Market Risk................................ 27
8. Consolidated Financial Statements and Supplementary Data.................................. 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 27
PART III
10. Directors and Executive Officers of the Registrant........................................ 28
11. Executive Compensation.................................................................... 28
12. Security Ownership of Certain Beneficial Owners and Management............................ 28
13. Certain Relationships and Related Transactions............................................ 28
PART IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................................................ 29
Signatures....................................................................................... 30
Consolidated Financial Statements ............................................................... F-1
Exhibits......................................................................................... E-1
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
PMC Commercial Trust (the "Company") is a real estate investment trust
("REIT") that originates loans to small business enterprises and owns limited
service hospitality properties. 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 lends primarily to borrowers
who operate in the lodging industry. The Company also targets loans for
commercial real estate and the service, retail and manufacturing industries. The
Company was formed, pursuant to the Texas Real Estate Investment Trust Act, on
June 4, 1993 and commenced operations on December 28, 1993. As a REIT, the
Company distributes at least 95% of its REIT taxable income to shareholders. See
"Tax Status." The investments of the Company are managed pursuant to investment
management agreements with PMC Advisers, Ltd. and its subsidiary ("PMC Advisers"
or the "Investment Manager"), an indirect wholly-owned subsidiary of PMC
Capital, Inc. ("PMC Capital"). See "Loan Originations" and "Investment Manager."
The Company generates income from interest earned on the loan portfolio, other
related fee income from its lending activities and rental income from property
ownership. The Company's investments include the ownership of commercial
properties. To date, these investments have been 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. or its
subsidiaries ("Amerihost") for $62.2 million in a sale/leaseback transaction
(the "Amerihost Transaction"). The Company intends to continue to attempt to
enhance shareholder value by increasing its loan portfolio and making strategic
acquisitions of commercial properties.
The Company's principal business objective is to maximize shareholder
value by maintaining long-term growth in cash available for distribution to the
Company's shareholders. The Company currently has four principal strategies to
achieve this objective. First, the Company expects to continue to benefit from
the established customer base of PMC Capital due to the referral system
available through PMC Advisers. Second, the Company is seeking to expand its
relationships with national hotel and motel franchisors to secure a consistent
flow of lending opportunities. Third, the Company will continue to seek
cost-effective financing to maximize its growth through structured financing
arrangements and other funding sources. See "Operations - Secured Financing
Transactions." Fourth, the Company intends to continue selectively investing in
commercial real estate.
LOAN ORIGINATIONS
The Company has primarily been a lender to small business owners in the
lodging industry. The majority of the Company's loans in the lodging industry
are to owner-managed facilities generally operating as franchises of national
hotel or motel brands. As of December 31, 1998, (i) 97% of the Company's
outstanding loan portfolio consisted of loans for the acquisition, renovation
and construction of hospitality properties, and (ii) Holiday Inn, Days Inn and
Comfort Inn franchisees accounted for 18.8%, 17.7% and 9.1%, respectively, of
the Company's outstanding loan portfolio.
The Company operates from the headquarters of the Investment Manager in
Dallas, Texas, and through loan production offices in Georgia and Arizona. The
Investment Manager receives loan referrals from PMC Capital and solicits loan
applications on behalf of the Company from borrowers, through personal contacts,
attendance at trade shows, meetings and correspondence with local chambers of
commerce, direct mailings, advertisements in trade publications and other
marketing methods. The Company is not responsible for any compensation to PMC
Capital for loan referrals. In addition, the Company has generated a significant
percentage of loans through referrals from lawyers, accountants, real estate and
loan brokers and existing borrowers. In some instances, the Company may make
payments to non-affiliated individuals who assist in generating loan
applications, with such payments generally not exceeding 1% of the principal
amount of the loan.
1
<PAGE> 4
LENDING ACTIVITIES
From December 28, 1993 (commencement of operations) through December
31, 1998, the Company has funded an aggregate principal amount (including
purchased loans) of approximately $196.1 million relating to 179 loans. The
weighted average interest rate for the Company's loans outstanding as of
December 31, 1998 was 10.3%.
The following table sets forth the interest rates charged under the
Company's portfolio for the loans originated for the five years in the period
ended December 31, 1998:
<TABLE>
<CAPTION>
INTEREST RATES AND PRINCIPAL AMOUNTS OF LOANS ORIGINATED (1)
(DOLLARS IN THOUSANDS)
INTEREST RATE RANGE
------------------------------------------------------------------
WEIGHTED
AVERAGE INTEREST
YEAR ENDED RATE TOTAL 8.00-8.99% 9.00-9.99% 10.00-10.99% 11.00-11.99% 12.00-12.99%
---------- ---------------- --------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994.......... 11.05% $ 33,658 $ - $ - $ 19,181 $ 14,346 $ 131
1995.......... 11.42% 31,711 - - 3,562 27,928 221
1996.......... 10.86% 40,430 - - 31,080 9,350 -
1997.......... 10.68% 43,129 - 1,457 39,076 2,596 -
1998.......... 9.53% 42,968 10,254 23,401 8,343 970 -
--------- -------- -------- -------- -------- ----------
Total..................... $ 191,896 $ 10,254 $ 24,858 $101,242 $ 55,190 $ 352
========= ======== ======== ======== ======== ==========
Percentage
of Portfolio.............. 100.0% 5.3% 12.9% 52.8% 28.8% 0.2%
========= ======== ======== ======== ======== ==========
</TABLE>
(1) Does not include purchased loans.
- ---------------------
During the years ended December 31, 1998 and 1997, the Company closed
loans to 27 and 33 borrowers, respectively. Aggregate fundings for the years
ended December 31, 1998 and 1997 were approximately $43.0 million and $43.1
million, respectively, and commitment fees collected were approximately $980,000
and $754,000, respectively. As of December 31, 1998 and 1997, approximately 25%
and 27%, respectively, of the Company's loan portfolio consisted of loans to
borrowers in Texas. No other state had a concentration of 10% or greater of the
loan portfolio at December 31, 1998 and 1997. The Company's loan portfolio was
approximately 97% and 96% concentrated in the lodging industry at December 31,
1998 and 1997, respectively. As of December 31, 1998 all loans were paying as
agreed (See "Delinquency and Collections"). From inception through December 31,
1998, the Company has not experienced any charge-offs.
When originating a loan, the Company charges a commitment fee. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 91,
this non-refundable fee, less direct costs associated with the origination, is
deferred and included as a reduction of the carrying value of loans receivable.
These net deferred commitment fees are recognized as an adjustment of yield over
the life of the related loan. The Company had approximately $2.3 million and
$1.5 million in net unamortized deferred commitment fees at December 31, 1998
and 1997, respectively.
2
<PAGE> 5
The following table sets forth a breakdown of the Company's loan
portfolio at December 31, 1998 to borrowers involved in the lodging (national
franchises and independent hospitality properties) and commercial real estate
industries:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF PRINCIPAL OF
PROPERTIES OUTSTANDING PORTFOLIO
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Holiday Inn................................. 19 $ 22,789 18.8%
Days Inn ................................... 15 21,540 17.7%
Comfort Inn ................................ 10 11,036 9.1%
Quality Inn................................. 5 8,100 6.7%
Best Western ............................... 6 7,229 5.9%
Econolodge.................................. 6 6,864 5.6%
Sleep Inn................................... 3 4,645 3.8%
Hampton Inn ................................ 4 4,535 3.7%
Ramada Inn.................................. 3 3,625 3.0%
Home and Hearth............................. 1 2,978 2.4%
Wingate Inn................................. 1 2,758 2.3%
Super 8..................................... 3 2,610 2.2%
Howard Johnson.............................. 2 2,523 2.1%
Sheraton.................................... 1 2,436 2.0%
Travelodge.................................. 2 1,981 1.6%
Comfort Suites.............................. 1 1,821 1.5%
Baymont (formerly Budgetel)................. 1 1,580 1.3%
Shoney's Inn................................ 1 1,419 1.2%
Microtel.................................... 1 1,254 1.0%
Clarion..................................... 1 1,110 .9%
--- -------- -----
Total of Franchise Affiliates............... 86 112,833 92.8%
Independent Hospitality Properties.......... 7 4,807 3.9%
Commercial Real Estate...................... 5 3,985 3.3%
--- -------- -----
Total....................................... 98 $121,625 100.0%
=== ======== =====
</TABLE>
The following table is a breakdown of loans originated on a quarterly
basis for the five years in the period ended December 31, 1998:
LOANS ORIGINATED OR PURCHASED BY QUARTER
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
First Quarter ........ $ 9,437 $13,955 $ 4,830 $ 9,328 $ 7,039
Second Quarter ....... 16,271 12,795 8,801 11,110 13,594
Third Quarter ........ 8,417 9,128 12,955 4,441 6,471
Fourth Quarter ....... 8,843 7,251 13,844 6,832 7,879
------- ------- ------- ------- -------
$42,968 $43,129 $40,430 $31,711 $34,983
======= ======= ======= ======= =======
</TABLE>
3
<PAGE> 6
The following table sets forth the amount of the Company's loans originated and
repaid for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans receivable, net-beginning of period ........ $ 109,132 $ 91,981 $ 59,129 $ 32,694 $ 3,119
Loans originated or purchased .................... 42,968 43,129 40,430 31,711 34,983
Loan repayments (1) .............................. (32,126) (25,843) (7,181) (4,992) (4,862)
Other adjustments (2) ............................ (262) (135) (397) (284) (546)
--------- --------- --------- --------- ---------
Loans receivable, net - end of period ............ $ 119,712 $ 109,132 $ 91,981 $ 59,129 $ 32,694
========= ========= ========= ========= =========
</TABLE>
- -----------------------
(1) Includes the payoff on certain SBA 504 program loans (see "SBA Section
504 Program") and prepaid loans.
(2) Includes effect of amortization of loans purchased at a discount and
commitment fees collected which are accounted for in accordance with
SFAS No. 91.
OPERATIONS
During the year ended December 31, 1998, the Company increased its loan
portfolio under management through the continued utilization of proceeds from
secured financing transactions and proceeds from borrowings under the Company's
revolving credit facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate and Prepayment
Risk."
SECURED FINANCING TRANSACTIONS
In March 1996, PMC Commercial Receivable Limited Partnership, a
Delaware limited partnership ("the 1996 Partnership"), completed a private
placement (the "1996 Private Placement") of $29,500,000 of its Fixed Rate Loan
Backed Notes, Series 1996-1 (the "1996 Notes"). The Company owns, directly or
indirectly, all of the interests of the 1996 Partnership. The 1996 Notes, issued
at par, have a stated maturity of 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 December
31, 1998, approximately $15.1 million of those loans remained outstanding. The
Company, through PMC Advisers, services the loans sold to the 1996 Partnership.
In connection with the 1996 Private Placement, the 1996 Notes were given a
rating of "AA" by Duff & Phelps Credit Rating Co. The terms of the 1996 Notes
provide that the partners of the 1996 Partnership are not liable for any payment
on the 1996 Notes. 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 Company, therefore, 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. 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 Company used approximately $10.3 million of such proceeds to
pay down outstanding borrowings under its credit facility and the remainder to
originate loans in accordance with its underwriting criteria. At December 31,
1998, the Company had utilized all proceeds from the 1996 Private Placement. 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 December 31, 1998 was $6.0 million.
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 $66,100,000 of its Fixed Rate Loan Backed Notes, Series
1998-1 (the "1998 Notes"). 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
4
<PAGE> 7
collateralized by an initial amount of approximately $71.9 million of loans
contributed by the Company to the 1998 Partnership. At December 31, 1998,
approximately $66.6 million of those loans remained outstanding. The Company,
through PMC Advisers, services the loans sold to the 1998 Partnership. In
connection with this transaction, the 1998 Notes were given a rating of "Aaa" by
Moody's Investors Service, Inc. The terms of the 1998 Notes provide that the
partners of the 1998 Partnership are not liable for any payment on the 1998
Notes. Accordingly, if the 1998 Partnership fails to pay the 1998 Notes, the
sole recourse of the holders of the 1998 Notes is against the assets of the 1998
Partnership. The Company, therefore, has no obligation to pay the 1998 Notes nor
do the holders of the 1998 Notes have any recourse against the assets of the
Company. The net proceeds from the issuance of the 1998 Notes (approximately
$46.5 million after giving effect to costs of approximately $400,000, repayment
of certain indebtedness related to the contributed loans of approximately $14.6
million, a $2.2 million initial reserve deposit held by the trustee as
collateral and a deposit of $2.4 million representing collections or prepayments
on the underlying loans due to the holders of the 1998 Notes) were distributed
to the Company in accordance with its interest in the 1998 Partnership. The
Company utilized these proceeds to help fund the acquisition of the acquired
Amerihost properties. 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 December 31, 1998 was $60.8 million.
AMERIHOST TRANSACTION
On May 21, 1998, the Company and Amerihost entered into an agreement
pursuant to which the Company agreed to acquire and leaseback 30 motel
properties. Pursuant to the sale/leaseback agreement, the Company leases the
acquired 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.
On June 30, 1998, the Company completed the acquisition of 26 of the
Amerihost properties (the "Acquired Amerihost Properties") for an aggregate
purchase price of $62.2 million. The acquired Amerihost properties contain an
aggregate of 1,575 rooms. The aggregate amount of the lease payments to be
received by the Company for the Acquired Amerihost Properties is $6.22 million
per year ("Base Rent"), plus 2% of gross revenues as defined in the master lease
agreement, subject to CPI increases as described above. Amerihost guarantees the
lease payment obligation of Amerihost Inns.
Subsequent to year end, the Company acquired the remaining four
properties for an aggregate purchase price of $10.8 million. The properties
contain an aggregate of 259 rooms. The aggregate amount of the lease payments to
be received by the Company for the four properties is $1.1 million per year,
subject to CPI increases as described above. Accordingly, the aggregate Base
Rent payment will increase to $7.3 million per year subject to the CPI
increases, plus 2% of the gross room revenues as defined in the master lease
agreement. The Company has assumed debt related to the four properties that
aggregates $6.8 million with a weighted average interest rate of 8.0%. This debt
is amortized over a 20 year period and has maturities of between 15 and 20
years. The debt assumed has restrictive provisions which provide substantial
penalties if paid prior to maturity.
SUPERTEL TRANSACTION
On June 3, 1998, the Company entered into an Agreement and Plan of
Merger with Supertel Hospitality, Inc. ("Supertel") pursuant to which Supertel
would have merged with and into the Company, subject to the satisfaction of
certain conditions to closing. On October 15, 1998, the Company announced that
the Company's Board of Trust Managers and the Supertel Board of Directors agreed
to terminate the merger agreement between the two companies. During the year
ended December 31, 1998, the Company expensed all merger related costs. Included
in expenses is the one-time charge of $569,000 (or $.09 per share) relating to
such merger costs.
5
<PAGE> 8
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current policies with
respect to investments, financing, affiliate transactions and certain other
activities. These policies may be amended or waived from time to time at the
discretion of our Board of Trust Managers without a vote of the Company's
shareholders.
The Company's principal business objective is to maximize shareholder
value by maintaining long-term growth in cash available for distribution to the
Company's shareholders. The Company intends to pursue this objective by
continuing to originate loans or through the acquisition of hospitality or
commercial properties for long-term ownership and thereby seeks to maximize
current and long-term net income and the value of its assets. The Company's
policy is to originate loans or acquire assets where the Company believes
opportunities exist for acceptable investment returns. No assurance can be given
that the Company's investment objectives will be attained or that the Company's
value will not decrease.
At the time of its initial public offering, the Company had established
a policy that 75% of its assets were to be used generally to fund loans to small
businesses. However, in May 1998, the Company amended its investment policies to
remove this restriction and to permit the Company to invest in real estate
assets. The Company believes that favorable opportunities exist for the
acquisition of lodging properties at attractive returns and at prices at or
below replacement cost, particularly with respect to smaller, limited service
motels operated under national franchises. On June 30, 1998 and during March
1999, the Company completed the acquisition of the 26 Acquired Amerihost
Properties and four additional Amerihost properties from Amerihost for $62.2
million and $10.8 million, respectively, in sale/leaseback transactions. The
Company will continue to acquire additional lodging or commercial properties or
portfolios of such properties thereby deriving revenues from fixed leases and
participating in increased revenue from those properties. The Company may, in
the future, expand its lending activities to finance real estate investors who
are not operators of the properties financed.
To date, the Company has concentrated 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) The property managers have demonstrated ability to pay fixed
lease obligations.
(iv) Portfolios of properties which exhibit some or all of the
criteria discussed above, where purchasing several properties in one
transaction enables the Company to obtain a favorable price or to
purchase attractive assets that otherwise would not be available.
Because the Company is independent of the lessees and operators of its
lodging properties, the Company has flexibility with respect to acquiring and
leasing additional hospitality real estate. 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.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE MORTGAGES
While the Company lends money secured by real estate, it does not
generally buy and sell existing real estate mortgages in its normal course of
business. However, the Company may invest in real estate mortgages if favorable
opportunities develop. The Company's investment in mortgages may be either in
first mortgages or junior mortgages and may or may not be insured by a
governmental agency. See "Underwriting Criteria -- Lending Operations"
6
<PAGE> 9
INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE
While the Company intends to emphasize funding loans to small
businesses, the Company will also invest in the ownership of real estate and may
invest in other real estate interests consistent with its qualification as a
REIT. Management expects to pursue this investment objective primarily through
first mortgages on real estate or direct ownership of properties. The Company
currently invests in hospitality properties primarily located in its target
markets which are primarily in the southern portion of the United States.
However, future investment activities will not be limited to any geographic area
or product type or to a specified percentage of the Company's assets.
Although the Company is not currently doing so, it may also participate
with other entities in property ownership, through joint ventures or other types
of common ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the Company's equity
interests.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS
Subject to the percentage of ownership limitations and gross income
tests necessary for REIT qualification, the Company may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. The Company,
however, does not currently have any intentions to do so. (See "Tax Status.")
PERIODIC REVIEW OF ASSETS
The Company regularly evaluates its investment portfolio and may, from
time to time, dispose of assets that no longer meet its investment criteria. The
Company reserves the right to dispose of any property if the Company determines
the disposition of such property is in its best interests and the best interests
of its shareholders.
FINANCING POLICIES
As a general policy, with respect to real estate ownership activity, the
Company intends to maintain a ratio of total indebtedness to the lower of cost
or appraised value of no greater than 70% at the time of acquisition. With
respect to mortgage lending activities, the Company will not, without the
approval of a majority of its shareholders, incur a borrowing or issue Preferred
Shares if as a result the Company's total liability for money borrowed would
exceed 200% of its shareholders' equity or the total amount of borrowings and
obligations in respect of outstanding Preferred Shares would exceed 300% of
common shareholders' equity, determined as of the time of each borrowing or
issuance.
The Company may from time to time reevaluate its debt policy in light
of factors which include, but are not limited to:
o current economic conditions,
o relative costs of debt and equity capital,
o change in the Company's market capitalization, and
o acquisition opportunities.
The Company may with respect to lending activities increase or decrease
the maximum ratio of debt to the lower of cost or appraised value without a vote
of its shareholders. The Company's Declaration of Trust and Bylaws do not
contain any limitations on the amount or percentage of indebtedness which the
Company may incur.
The Company's future indebtedness, which may be unsecured or may be
secured by either mortgage loans or other interest in properties, may take
several forms, including:
(i) bank borrowings,
7
<PAGE> 10
(ii) purchase money obligations to the sellers of
properties,
(iii) assumed indebtedness,
(iv) publicly or privately placed debt instruments,
(v) financing from institutional investors or other
lenders, or
(vi) mortgage debt.
The recourse of the holders of the Company's debt may be to all or any
part of the Company's properties or may be limited to the particular property to
which the debt relates. Subject to any contractual restrictions, the proceeds
from any borrowings may be used for the payment of distributions, for working
capital, to refinance existing indebtedness or to finance acquisitions of new
properties.
In the event the Board of Trust Managers determines to raise additional
equity capital, the Board of Trust Managers has the authority, without
shareholder approval, to issue additional shares of common stock or shares of
Preferred Stock in any manner, and on such terms and for such consideration, it
deems appropriate, including in exchange for property. Any such issuance will be
subject to the provisions of the Texas REIT rules. Existing shareholders would
have no preemptive right to purchase such shares in any offering, and any such
offering might cause dilution of a shareholder's investment.
OTHER POLICIES
The Company may dispose of properties that are not performing up to
standards. The Company has historically operated, and intends to continue
operating, in a manner that will not be subjected to regulation under the
Investment Company Act of 1940. The Company has not, and currently has no future
plans to (1) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (2) underwrite securities of other
issuers, or (3) actively trade in loans or other investments. The Company's
policies with respect to such activities may be reviewed and modified by the
Board of Trust Managers from time to time without a vote of its shareholders.
At present, the Company does not have a stock repurchase program. As
market conditions may warrant, the Company may institute a stock repurchase
program.
From time to time the Company may issue or exchange securities for
property ownership, as warranted.
UNDERWRITING CRITERIA - LENDING OPERATIONS
The Company primarily originates loans to small businesses that (i)
exceed the net worth, asset, income, number of employees or other limitations
applicable to the SBA programs utilized by PMC Capital, (ii) require funds in
excess of $1.1 million without regard to SBA eligibility requirements, or (iii)
require funds which PMC Capital does not have available and which otherwise meet
the Company's underwriting criteria. Such loans ("Primary Investments") are
primarily collateralized by first liens on real estate of the related business,
are personally guaranteed by the principals of the entities obligated on the
loans and are subject to the Company's underwriting criteria.
The underwriting criteria applied by the Company to evaluate
prospective borrowers generally requires such borrowers to (i) provide
first-lien real estate mortgages not exceeding 70% of the lesser of appraised
value or cost, (ii) provide proven management capabilities, (iii) meet
historical or projected debt coverage tests determined on a case-by-case basis
as described below, and (iv) have principals with satisfactory credit histories
and provide personal guarantees, as applicable. The Company evaluates a number
of factors to determine the credit worthiness of the prospective borrower and
the amount of required debt coverage for the borrower, including:
8
<PAGE> 11
o the components and value of the borrower's collateral (for example,
real estate, equipment or marketable securities);
o the ease with which the collateral can be liquidated;
o the industry and competitive environment in which the borrower
operates;
o the financial strength of the guarantors;
o the existence of any secondary repayment sources; and
o the existence of a franchise relationship.
LOAN PORTFOLIO CHARACTERISTICS
As a result of the application of the Company's underwriting criteria,
at December 31, 1998 the Company's loan portfolio had the following
characteristics:
(i) Loans used by borrowers to acquire real estate and/or
construct improvements thereon (the "Real Estate Loans") are
secured by first liens on such real estate or improvements
thereon. Generally, each of the related loans used to acquire
furniture, fixtures and equipment for certain of such real
estate (the "FFE Loans") is secured by a first lien on the
furniture, fixtures and equipment acquired with the proceeds
of such loan and by a second lien on the real estate of the
borrower under the related Real Estate Loans. Other additional
properties of certain borrowers or guarantors have been used
as additional collateral in some instances.
(ii) All originated loans are guaranteed by the principal(s) of the
borrowers.
(iii) The loan amounts of Real Estate Loans (together with related
FFE Loans) are generally equal to or less than 70% of the
appraised value or cost of the primary collateral. When deemed
necessary, credit enhancements, such as additional collateral,
are obtained to assure a maximum 70% loan-to-value ratio.
Set forth below is certain information regarding the Company's
portfolio as of December 31, 1998:
a. The Company had 108 loans outstanding with an aggregate principal
amount of approximately $121.6 million.
b. All loans were paying as agreed at December 31, 1998. No loans
were more than 31 days delinquent.
c. Borrowers are principally involved in the lodging industry (97%).
The remainder of the loan portfolio is comprised of five loans in
the commercial office rental market.
d. The Company has not loaned more than 10% of its assets to any
single borrower.
e. All originated loans provide for interest payments at fixed
rates.
f. All originated loans, other than bridge loans for the SBA Section
504 program (the "SBA 504 Program"), have original maturities
ranging from five to 20 years which may be extended, subject to
certain conditions, by mutual agreement of the Company and the
borrower until the loan is fully amortized if such amortization
period exceeds the stated maturity.
g. Originated loans, other than SBA 504 Program loans, provide for
scheduled amortization (ranging from six to 20 years).
Substantially all Real Estate Loans entitle the borrower to
prepay all or part of the principal amount, subject to a
prepayment penalty.
h. The weighted average remaining contractual maturity for the
Company's portfolio of loans not including amounts outstanding to
be paid off pursuant to the SBA 504 program was approximately 10
years.
9
<PAGE> 12
DELINQUENCY AND COLLECTIONS
As of December 31, 1998, the Company had no loans which were greater
than 31 days delinquent. Generally, if a borrower fails to make a required
monthly payment, the borrower will generally be notified by mail after 10 days
and a late fee will generally be assessed. If the borrower has not responded or
made full payment within 20 days after the loan becomes delinquent, a second
notification letter will be sent. Following such notification, a collection
officer will initiate telephone contact. If the borrower has not responded or
made full payment within 30 days after the loan becomes delinquent, a third
notification letter will be sent and follow-up telephone contact will be made by
the collection officer. In the event a borrower becomes 45 days delinquent, a
ten day demand letter will be sent to the borrower requiring the loan to be
brought current within ten days. After the expiration of the ten day period, the
Company may proceed with legal action. The Company's policy with respect to
loans which are in arrears as to interest payments for a period in excess of 60
days is generally to discontinue the accrual of interest income. The Company
will deliver a default notice and begin foreclosure and liquidation proceedings
when it determines that pursuit of these remedies is the most appropriate course
of action. The Company continually monitors loans for possible exposures to
loss. In its analysis, the Company reviews various factors, including the value
of the collateral securing the loan and the borrower's payment history. Based
upon this analysis, a loan loss reserve will be established as considered
necessary.
SBA SECTION 504 PROGRAM
The Company participates as a private lender in the SBA 504 Program.
Participation in the SBA 504 Program offers an opportunity to enhance the
collateral status of loans. The SBA 504 Program provides assistance to small
business enterprises in obtaining subordinated, long-term financing by
guaranteeing debentures available through certified development companies (CDCs)
for the purpose of acquiring land, buildings, machinery and equipment and for
modernizing, renovating or restoring existing facilities and sites. A typical
finance structure for an SBA 504 Program project would include a first mortgage
covering 50% of the project cost from a private lender such as the Company, a
second mortgage obtained through the SBA 504 Program covering up to 40% of the
project cost and a contribution of at least 10% of the project cost by the
principals of the small business enterprise being assisted. The Company
generally requires at least 15% of the equity in a project to be contributed by
the principals of the borrower. The first mortgage is not guaranteed by the SBA.
Although the total size of projects utilizing the SBA 504 Program guarantees are
unlimited, the maximum amount of subordinated debt in any individual project
generally is $750,000 (or $1 million for certain projects). Typical project
costs range in size from $500,000 to $2.5 million. A business eligible for
financing pursuant to the SBA 504 Program must (i) be a for-profit corporation,
partnership or proprietorship, (ii) not exceed $6 million in net worth, and
(iii) not exceed $2 million in average net income (after Federal income taxes)
for each of the previous two years. Financing pursuant to the SBA 504 Program
cannot be used for working capital or inventory, consolidating or repaying debt
or financing a plant not located in the U.S. or its possessions. As of December
31, 1998, the Company had approximately $2.0 million in principal outstanding
which is anticipated to be paid off by permanent subordinated financing provided
by the SBA 504 Program.
BORROWER ADVANCES
The Company finances some projects during the construction phase. At
December 31, 1998, the Company was in the process of monitoring construction
projects with approximately $8.6 million in total commitments, of which $3.4
million had been funded. As part of the monitoring process to verify that the
borrower's equity investment is utilized for its intended purpose, the Company
holds a portion of the borrower's equity investment. These funds are itemized by
category (e.g., interest, inventory, construction contingencies, etc.) and are
released by the Company only upon presentation of appropriate documentation
relating to the construction project. To the extent possible, these funds are
utilized before any related loan proceeds are disbursed. At December 31, 1998,
approximately $788,000 of the borrower advances were to be disbursed on behalf
of borrowers and are included as a liability on the accompanying consolidated
balance sheet.
TAX STATUS
The Company has elected to be taxed as a REIT under Section 856(c) of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the
Company generally is not subject to Federal income tax (including any applicable
alternative minimum tax) to the extent it distributes at least 95% of its REIT
taxable income to shareholders. The Company may, however, be subject to certain
Federal excise taxes and state and local taxes on its income and property. REITs
are subject to a number of organizational and operational requirements under the
Code.
10
<PAGE> 13
INVESTMENT MANAGER
The loans of the Company are managed by 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 entered into in June 1998 (the "Lease Supervision Agreement" and
together with the IMA the "IMAs").
The Investment Manager, PMC Capital and the Company have entered into a
loan origination agreement (the "Loan Origination Agreement") designed to avoid
conflicts of interest regarding the loan origination function. The Loan
Origination Agreement generally requires that loans which meet the Company's
underwriting criteria be funded by the Company, provided that funds are
available. Generally, the Company originates loans to borrowers who exceed one
or more of the limitations applicable to the SBA Section 7(a) Program and SBIC
loan programs utilized by PMC Capital's subsidiaries. The Company will not
originate loans in principal amounts less than $1.1 million which qualify for
SBA Section 7(a) Program or SBIC loan programs unless PMC Capital is unable to
originate such loans because of insufficient available funds. Accordingly, loans
will not be made by PMC Capital other than: (i) loans in an original principal
amount not exceeding $1.1 million which qualify for the Small Business
Association ("SBA") Section 7(a) or small business investment company ("SBIC")
loan programs utilized by its subsidiaries and (ii) bridge loans to be
refinanced by PMC Capital through the SBA Section 7(a) loan program (the "SBA
7(a) Program") upon approval of the SBA loan application.
Upon receipt of a completed loan application, the Investment Manager's
credit department (which is also the credit department for PMC Capital)
conducts: (i) an analysis of the loan which may include either a third-party
appraisal or valuation, by the Investment Manager, of the property
collateralizing the loan to assure compliance with loan-to-value ratios, (ii) a
site inspection generally by a member of senior management of the Investment
Manager, (iii) a review of the borrower's business experience and (iv) a credit
history and an analysis of debt service coverage and debt-to-equity ratios.
The Investment Manager's loan committee (which is also the loan
committee of PMC Capital), which is comprised of members of the Company's senior
management, makes a determination with respect to each loan application. The
Investment Manager's loan committee generally meets on a daily basis and either
approves the loan application as submitted, approves the loan application
subject to additional conditions or rejects the loan application. After a loan
is approved, the credit department will prepare and submit to the borrower a
good faith estimate and cost sheet detailing the anticipated costs of the
financing. The closing department reviews the loan file and assigns the loan to
the Company's outside counsel, the fees of whom are paid by the borrower. Prior
to authorizing disbursement for any funding of a loan, the closing department
reviews the loan documentation obtained from the closing attorney.
After a loan is closed, the Investment Manager's servicing department
(which is also the servicing department of PMC Capital) is responsible on an
ongoing basis for (i) obtaining all financial information required by the loan
documents, (ii) verifying that adequate insurance remains in effect, (iii)
continuing Uniform Commercial Code financing statements evidencing the loan, if
required, (iv) collecting and applying loan payments, and (v) monitoring
delinquent accounts.
The Company, PMC Capital and PMC Advisers are managed by the same
executive officers. Three of the seven trust managers of the Company are
directors of PMC Capital. PMC Capital is primarily engaged in the business of
originating loans to small businesses under loan guarantee and funding programs
sponsored by the SBA. The Company was organized to provide loans to persons or
entities whose borrowing needs and/or strength and stability exceed the
limitations set for SBA approved loan programs. As a result, the Company and PMC
Capital generally pursue different prospective borrowers. In order to further
mitigate the potential for conflicts of interest, the Company, PMC Capital and
PMC Advisers have entered into the Loan Origination Agreement. Pursuant to the
Loan Origination Agreement, loans which meet the Company's underwriting criteria
are to be first presented to the Company for funding by PMC Advisers. If the
Company does not have available funds, origination opportunities presented to
the Company may be originated by PMC Capital or it subsidiaries. Many of the
Company's existing and potential borrowers have other projects that are
currently financed by PMC Capital. The fee of PMC Advisers is primarily based on
the value of the Company's assets. In order to mitigate the risk to the Company
from increasing its loan base through leveraged transactions, the IMAs between
the Company and PMC Advisers provide PMC Advisers with a reduced fee for any
loan acquired through additional borrowings. Additionally the potential conflict
for the management of PMC Advisers between the Company and PMC Capital is
mitigated through the Loan Origination Agreement described above.
11
<PAGE> 14
Pursuant to the amended IMA, the quarterly servicing and advisory fee
(the "Base Fee") is equal to (i) 0.4167% (1.67% on an annual basis) of the
lesser of (a) the average quarterly value of common equity capital or (b) the
average quarterly value of all invested assets and (ii) 0.21875% (0.875% on an
annual basis) of the difference between the average quarterly value of all
invested assets and the average quarterly value of common equity capital. For
purposes of calculating the Base Fee, the average quarterly value of common
equity capital is not increased by the proceeds received from any public
offering of Common Shares by the Company (other than pursuant to the Company's
dividend reinvestment plan or any employee/trust manager benefit plan) during
the 180 calendar day period immediately following such public offering. In
addition, such compensation includes a consulting fee equal to (i) 12.5% of any
offering fees (underwriting or placement fees) incurred by the Company pursuant
to the public offering or private placement of Common Shares, and (ii) 50% of
any issuance or placement fees incurred by the Company pursuant to the issuance
of the Company's debt securities or preferred shares of beneficial interest.
Specific definitions of the terms and calculation of averages noted herein are
pursuant to the IMA.
Pursuant to the IMAs, including amendments, the Company incurred an
aggregate of approximately $2.6 million, $1.6 million and $1.6 million in
management fees for the years ended December 31, 1998, 1997 and 1996,
respectively. Approximately $218,000 of fees incurred during the year ended
December 31, 1998 related to the Lease Supervision Agreement. Of the total
management fees paid or payable to the Investment Manager as of December 31,
1998, 1997 and 1996, $198,000, $172,500 and $318,500, respectively, have been
offset against commitment fees as direct costs of originating loans. In 1998,
$165,000 was capitalized as part of the structured financing completed in June
1998, and $466,000 of fees charged related to the purchase of the Acquired
Amerihost Properties was capitalized as a cost of the properties. In 1996,
$251,000 was offset against additional paid-in capital as a cost of completing
the common stock offering in July 1996.
COMPETITION
The Company's primary competition comes from banks, financial
institutions and other lending companies. Additionally, there are lending
programs which have been established by national franchisors in the lodging
industry. Some of these competitors have greater financial and larger managerial
resources than the Company. Competition has increased as the financial strength
of the banking and thrift industries improved. In management's opinion, there
has been an increasing amount of competitive lending activity at advance rates
and interest rates which are considerably more aggressive than those offered by
the Company. In order to maintain a quality portfolio, the Company will continue
to adhere to its historical underwriting criteria, and as a result, certain loan
origination opportunities will not be funded by the Company. The Company
believes that it competes effectively with such entities on the basis of the
lending programs offered, the interest rates, maturities and payment schedules,
the quality of its service, its reputation as a lender, the timely credit
analysis and decision making processes, and the renewal options available to
borrowers.
AMERICANS WITH DISABILITIES ACT
The Americans with Disabilities Act of 1990 ("ADA") requires all public
accommodations and commercial facilities to meet federal requirements related to
access and use by disabled persons. Compliance with the Americans with
Disabilities Act requirements could require removal of access barriers, and
noncompliance could result in imposition of fines by the U.S. Government or an
award of damages to private litigants. Although the Company believes that the
properties are substantially in compliance with these requirements, a
determination that the properties are not in compliance with the ADA could
result in the imposition of fines or an award of damages to private litigants.
Pursuant to the master lease agreements relating to the properties costs and
fines associated with the ADA are the responsibility of the tenant. If a default
occurs, the Company's cash flow and the amounts available for distributions to
shareholders may be adversely affected.
REPORTS TO SHAREHOLDERS
The Company provides annual reports to the holders of Common Shares
containing audited financial statements with a report thereon from the Company's
independent public accountants and, upon request, quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
12
<PAGE> 15
EMPLOYEES
The Company has no salaried employees. All personnel required for the
Company's operations are provided by the Investment Manager.
ITEM 2. PROPERTIES
The Company operates from the headquarters of the Investment Manager in
Dallas, Texas, and through loan production offices in Georgia and Arizona.
At December 31, 1998, the Company owns 26 limited service hospitality
properties and such properties are unencumbered. These properties are leased
pursuant to a sale/leaseback transaction (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent
Developments"). No lease revenue from any of the 26 properties is greater than
2% of the Company's annual revenues. Set forth below is a table describing the
location, number of rooms and year built relating to each of these properties.
<TABLE>
<CAPTION>
ROOMS IN YEAR
CITY STATE HOTEL BUILT
---- ----- -------- -----
<S> <C> <C> <C> <C>
Anderson California 61 1997
Yreka California 61 1997
Eagles Landing Georgia 60 1995
La Grange Georgia 59 1995
Smyrna Georgia 60 1996
Rochelle Illinois 61 1997
Mt. Pleasant Iowa 63 1997
Storm Lake Iowa 61 1997
Coopersville Michigan 60 1996
Grand Rapids North Michigan 60 1995
Grand Rapids South Michigan 61 1997
Hudsonville Michigan 61 1997
Monroe Michigan 63 1997
Port Huron Michigan 61 1997
Tupelo Mississippi 61 1997
Warrenton Missouri 63 1997
Ashland Ohio 62 1996
Mansfield Ohio 60 1994
Wooster East Ohio 58 1994
Wooster North Ohio 60 1995
Grove City Pennsylvania 61 1997
Shippensburg Pennsylvania 60 1996
Jackson Tennessee 61 1998
McKinney Texas 61 1997
Kimberly Wisconsin 63 1997
Mosinee Wisconsin 53 1993
-------
1,575
=======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation
incidental to its business. The Company does not believe that its current
proceedings will have a material adverse effect on the results of operations or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the last
quarter of the year ended December 31, 1998.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Shares have been traded on the American Stock Exchange (the
"AMEX") under the symbol "PCC" since February 1995. On February 26, 1999, there
were 839 holders of record of Common Shares and the last reported sales price of
the Common Shares was $14.63. The following table sets forth for the periods
indicated the high and low sales prices as reported on the AMEX and the
dividends per share declared by the Company for each such period.
<TABLE>
<CAPTION>
Regular Special
Dividends Dividends
Per Per
Quarter Ended High Low Share Share
------------- ---- --- --------- ---------
<S> <C> <C> <C> <C>
March 31, 1996............................... $17.88 $15.75 $0.370 --
June 30, 1996................................ $17.38 $15.25 $0.380 --
September 30, 1996........................... $16.88 $14.63 $0.385 --
December 31, 1996............................ $18.00 $15.88 $0.390 $0.02
March 31, 1997............................... $18.38 $17.00 $0.400 --
June 30, 1997................................ $19.25 $16.63 $0.410 --
September 30, 1997........................... $20.63 $18.00 $0.420 --
December 31, 1997............................ $20.75 $18.75 $0.430 --
March 31, 1998............................... $20.75 $19.50 $0.435 --
June 30, 1998................................ $20.56 $17.88 $0.440 --
September 30, 1998........................... $18.88 $15.13 $0.450 --
December 31, 1998............................ $17.94 $13.06 $0.455 --
</TABLE>
14
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company for the five years ended December 31, 1998. The following data
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this Form
10-K. The selected financial data presented below has been derived from the
consolidated financial statements of the Company audited by
PricewaterhouseCoopers LLP, independent public accountants, whose report with
respect thereto is included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income-loans ..................... $13,496 $12,378 $ 8,528 $ 5,610 $ 2,289
Lease income .............................. 3,314 -- -- -- --
Interest and dividends - other
investments ............................ 321 643 1,235 325 1,222
Other income .............................. 2,177 792 385 295 180
------- ------- ------- ------- -------
Total revenues .............................. 19,308 13,813 10,148 6,230 3,691
------- ------- ------- ------- -------
Expenses:
Interest .................................. 4,289 1,726 1,805 222 37
Advisory and servicing fees, net .......... 1,809 1,449 992 945 357
Depreciation .............................. 976 -- -- -- --
Other ..................................... 863 249 174 167 97
------- ------- ------- ------- -------
Total expenses .............................. 7,937 3,424 2,971 1,334 491
------- ------- ------- ------- -------
Net income .................................. $11,371 $10,389 $ 7,177 $ 4,896 $ 3,200
======= ======= ======= ======= =======
Weighted average common shares
outstanding ............................... 6,498 6,242 4,755 3,451 3,430
Basic and diluted earnings
per common share .......................... $ 1.75 $ 1.66 $ 1.51 $ 1.42 $ 0.93
Dividends per common share .................. $ 1.78 $ 1.65 $ 1.55 $ 1.38 $ 1.02
Return on average assets (1) ................ 6.9% 8.6% 7.6% 8.8% 6.5%
Return on average common
beneficiaries' equity (2) .............. 12.2% 11.9% 11.3% 10.2% 6.9%
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net .................. $119,712 $109,132 $ 91,981 $ 59,129 $ 32,694
Real estate investments, net ........... $ 61,774 $ -- $ -- $ -- $ --
Total assets ........................... $196,690 $115,877 $121,749 $ 59,797 $ 51,785
Notes payable .......................... $ 95,387 $ 18,721 $ 26,648 $ 7,920 $ --
Beneficiaries' equity .................. $ 93,437 $ 91,242 $ 85,829 $ 48,183 $ 47,440
Total liabilities and beneficiaries'
equity .............................. $196,690 $115,877 $121,749 $ 59,797 $ 51,785
</TABLE>
- --------------
(1) Based on average annual value of all assets which is the book value of
total assets of the Company or any Person wholly-owned (directly or
indirectly) by the Company determined in accordance with GAAP on the
first day of the year and on the last day of each quarter of such year,
divided by five.
(2) Based on the total beneficiaries' equity on the first day of the year and
on the last day of each quarter of such year divided by five.
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated 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 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 years ended December
31, 1998, 1997 and 1996, the Company originated and funded $43.0 million, $43.1
million and $40.4 million of loans. A substantial portion of such 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
equal to or slightly less than originations during each of the previous two
years. On June 30, 1998, the Company completed the acquisition of 26 motel
properties (the "Acquired Amerihost Properties") from Amerihost Properties, Inc.
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.
As of December 31, 1998, the Company's total loan portfolio outstanding
was $121.6 million ($119.7 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 10.3%. 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 or prepayment
fees earned. The annualized average yields on loans, including all loan fees and
prepayment fees earned, for the years ended December 31, 1998, 1997 and 1996
were approximately 13.1%, 12.4% and 12.1%, respectively. Generally, these loans
are collateralized by first liens on real estate and are guaranteed by the
principals of the businesses financed. Included in principal outstanding at
December 31, 1998 are $2.0 million of interim financing which have been advanced
pursuant to the SBA 504 Program. Interest rates charged on such advances are
comparable to those which are customarily charged by the Company.
As of December 31, 1998, the Company had no loans which were greater
than 31 days delinquent. However, 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 December
31, 1998 was approximately $1,026,000. The borrower was current on all loan
payments as of December 31, 1998. 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.
The Company believes that favorable opportunities exist for the
acquisition of properties at attractive returns, at prices at or below
replacement cost. Accordingly, the Company intends to continue to acquire
additional properties or portfolios of properties thereby deriving revenues from
fixed leases and participating in increased revenue from those properties.
The Company concentrates its real estate investment activities on
properties, or portfolios of properties, which meet one or more of the following
criteria:
(i) Properties located in areas with a variety of revenue
generators, such as colleges, recreational areas or interstate
highways.
(ii) Properties with intrinsic values equal to or less than
replacement values.
(iii) Properties which are currently managed by a management group
with a demonstrated ability to pay fixed lease obligations.
(iv) Portfolios of properties which exhibit some or all of the
criteria discussed above, where purchasing several properties
in one transaction enables the Company to obtain a favorable
price or to purchase attractive assets that otherwise would
not be available.
With respect to the acquisition of limited service hospitality
properties, because the Company is independent of the lessees and operators of
its lodging properties, the Company has flexibility with respect to acquiring
and leasing
16
<PAGE> 19
additional hospitality properties. The Company intends to continue to pursue
acquisitions of lodging properties as part of its efforts to attain its 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 agreed to acquire and
leaseback 30 motel properties. Pursuant to the sale/leaseback agreement, the
Company leases the Acquired 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.
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 an aggregate of 1,575 rooms. The
aggregate amount of the lease payments to be received by the Company for the
Acquired Amerihost Properties is $6.22 million per year ("Base Rent"), plus 2%
of gross revenues as defined in the master lease agreement, subject to CPI
increases as described above. Amerihost guarantees the lease payment obligation
of Amerihost Inns.
Subsequent to year end, the Company acquired the remaining four
properties for an aggregate purchase price of $10.8 million. The properties
contain an aggregate of 259 rooms. The aggregate amount of the lease payments to
be received by the Company for the four properties is $1.1 million per year,
subject to CPI increases as described above. Accordingly, the aggregate Base
Rent payment for the 30 Acquired Amerihost Properties will increase to $7.3
million per year (subject to the CPI increases as described above) plus 2% of
the gross room revenues as defined in the master lease agreement. The Company
has assumed debt related to the four properties that aggregates $6.8 million
with a weighted average interest rate of 8.0%. This debt is amortized over a 20
year period and has maturities of between 15 and 20 years. The debt assumed has
restrictive provisions which provide substantial penalties if paid prior to
maturity.
Summarized financial information for Amerihost Properties, Inc. (derived from
the Amerihost public filings) as of December 31, 1998 and 1997, and for the
years ended December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Investment in hotel assets $ 96,669 $ 75,635
Cash and short-term investments 4,494 2,350
Total assets 115,281 92,668
Total debt 96,965 71,075
Shareholder's equity 18,316 21,593
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue $ 68,618 $ 62,666 $ 68,342
Operating income 3,084 1,980 6,453
Net income (loss) (2,796) (996) 3,395
</TABLE>
Amerihost Properties, Inc. is a public entity that files periodic
reports with the SEC. Additional information about Amerihost can be obtained
from the SEC's website at http://www.sec.gov.
17
<PAGE> 20
The following tables show statistical data regarding the 26 Acquired
Amerihost Properties. The four Amerihost properties which the Company acquired
subsequent to December 31, 1998 are located in Plainfield, Indiana (60 rooms)
and Marysville, Ohio (79 rooms), Macomb, Illinois (60 rooms) and Sycamore,
Illinois (60 rooms).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
% INCREASE
1998(1) 1997(1) (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
Occupancy 57.30% 53.70% 7%
ADR (2) $ 52.97 $ 52.78 --
RevPAR (3) $ 30.35 $ 28.33 7%
</TABLE>
(1) The tables show financial and statistical data of the properties
for the years presented which includes periods prior to June 30,
1998 (the date the Company acquired the properties). Room revenue
was $17,275,000 and $11,363,000 for the years ended December 31,
1998 and 1997, respectively. The increase in revenue for the year
ended December 31, 1998, when compared to the year ended December
31, 1997, is due to construction of additional properties. Total
available rooms increased from 401,146 during the year ended
December 31, 1997 to 569,124 during the year ended December 31,
1998. 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.
SUPERTEL TRANSACTION. On June 3, 1998, the Company entered into an
Agreement and Plan of Merger with Supertel Hospitality, Inc. ("Supertel")
pursuant to which Supertel would have merged with and into the Company, subject
to the satisfaction of certain conditions to closing. On October 15, 1998, the
Company announced that the Company's Board of Trust Managers and the Supertel
Board of Directors agreed to terminate the merger agreement. During the year
ended December 31, 1998, the Company expensed the merger related costs. Expenses
include a one-time charge of approximately $569,000 (or approximately $.09 per
share) relating to such transaction costs.
SECURED FINANCING TRANSACTION. 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 $66,100,000 of its Fixed
Rate Loan Backed Notes, Series 1998-1 (the "1998 Notes"). 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 December 31, 1998, approximately $65.2 million of those loans
remained outstanding. The Company, through PMC Advisers, services the loans sold
to the 1998 Partnership. In connection with this transaction, the 1998 Notes
were given a rating of "Aaa" by Moody's Investors Service, Inc. The terms of the
1998 Notes provide that the partners of the 1998 Partnership are not liable for
any payment on the 1998 Notes. Accordingly, if the 1998 Partnership fails to pay
the 1998 Notes, the sole recourse of the holders of the 1998 Notes is against
the assets of the 1998 Partnership. The Company, therefore, has no obligation to
pay the 1998 Notes nor do the holders of the 1998 Notes have any recourse
against the assets of the Company. The net proceeds from the issuance of the
1998 Notes (approximately $46.5 million after giving effect to costs of
approximately $400,000, repayment of certain indebtedness related to the
contributed loans of approximately $14.6 million, a $2.2 million initial reserve
deposit held by the trustee as collateral and a deposit of $2.4 million
representing collections or prepayments on the underlying loans due to the
holders of the 1998 Notes) were distributed to the Company in accordance with
its interest in the 1998 Partnership. The Company utilized these proceeds to
help fund the acquisition of the Acquired Amerihost Properties. 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 December 31, 1998 was $60.8 million.
LOAN PREPAYMENT CONSIDERATIONS
The terms of the loans originated by the Company generally provide that
voluntary prepayments of principal
18
<PAGE> 21
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.
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 ("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 or invests in properties which are purchased and leased back
(typically long-term at fixed rates). 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 dividend distributions. 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 ("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 Board of Trust Managers when
significant doubt exists as to the ultimate realization of the loan. As of
December 31, 1998, a $100,000 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 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
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
The net income of the Company during the years ended December 31, 1998
and 1997, was $11.4 million and $10.4 million, or $1.75 and $1.66 per share,
respectively. The primary source of revenues for the Company is interest income
on loans. Interest income-loans is dependent on the interest rates for the
Company's outstanding loans and the dollar volume of outstanding loans. Since
the Company borrows funds to generate loan origination, the Company's net income
is dependent upon the spread at which it borrows funds and the rate at which the
company loans those funds. See "Business Interest Rate and Prepayment Risk."
Over the past several years, that spread has decreased. Consequently, the
Company has sought to increase its outstanding loan portfolio, its fees related
to lending operations and its revenues from new REIT-related activities in
order to increase net income. The annualized yield on loans, including all loan
and prepayment fees earned, during the years ended December 31, 1998 and 1997
was approximately
19
<PAGE> 22
13.1% and 12.4%, respectively. The yield increased during the year ended
December 31, 1998 as a result of the recognition of increased prepayment fees
(included in other income as discussed below) and the remaining unamortized
deferred fees as income on loan prepayments. The Company's earnings per share
during the years ended December 31, 1998 and 1997 includes the effect of stock
issuances under the Company's Dividend Reinvestment and Share Purchase Plan
("DRP"). Accordingly, the Company's weighted average shares outstanding
increased by 4%, from 6,242,182 during the year ended December 31, 1997, to
6,497,924 during the year ended December 31, 1998.
Interest income - loans increased by $1.1 million (9%), from $12.4
million during the year ended December 31, 1997, to $13.5 million during the
year ended December 31, 1998. Interest income-loans represents income to the
Company generated primarily by interest earned on the Company's outstanding
loans and the accretion of deferred commitment fees of approximately $706,000
and $674,000 for the years ended December 31, 1998 and 1997, respectively. These
commitment fees are non-refundable fees which are collected as part of the
origination of a loan. These fees, net of related expenses, are recognized over
the period the applicable loans are anticipated to be outstanding.
This $1.1 million increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the year ended December 31, 1998 as a result of 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 $13.9 million (13%), from $105.0 million during the year
ended December 31, 1997, to $118.9 million during the year ended December 31,
1998.
Lease income was $3.3 million during the year ended December 31, 1998.
This amount is attributable to the lease payments received on the Amerihost
Properties, acquired by the Company on June 30, 1998, pursuant to the
sale/leaseback agreement.
Interest and dividends - other investments decreased by $322,000 (50%),
from $643,000 during the year ended December 31, 1997, to $321,000 during the
year ended December 31, 1998. Interest and dividends - other investments is
primarily generated by the investment of the Company's available funds in
short-term investments pending the origination of loans with such funds and the
interest earned on the Company's restricted investments. Interest and dividends
- -other investments will usually increase temporarily following completion of a
financing by the Company. The complete use of the financing proceeds may take
between three months and one year depending on the amount of the proceeds,
availability of lending opportunities and the Company's outstanding unfunded
commitments. However, the proceeds from the 1998 Private Placement (completed in
June 1998) were immediately used to purchase the Amerihost Properties, having
little effect on the average short-term investment balance. The average
short-term investments of the Company decreased by $7.4 million (61%), from
$12.2 million during the year ended December 31, 1997, to $4.8 million during
the year ended December 31, 1998. This decrease in average short-term
investments is attributable to the reallocation of the Company's investments
from cash and government securities to higher-yielding loans to small
businesses. The average yields on short-term investments during the years ended
December 31, 1998 and 1997 were approximately 5.0% and 5.3%, respectively.
Other income increased by $1.4 million (175%), from $792,000 during the
year ended December 31, 1997, to $2,177,000 during the year ended December 31,
1998. 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. This increase in other income was primarily
attributable to an increase in income recognized from prepayment fees of
$1,355,000, from $470,000 during the years ended December 31, 1997, to
$1,825,000 during the year ended December 31, 1998. During the years ended
December 31, 1998 and 1997, 25 and 18 loans in the amount of approximately $26.0
million and $18.3 million, respectively, paid in full. Prepayment fee income as
a percentage of prepaid loans was greater during the year ended December 31,
1998 than during the year ended December 31, 1997 as a result of the yield
maintenance provisions of the prepayment fees. 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. The Company experienced a 42% increase in the
dollar amount of prepaid loans during 1998 as compared to 1997. While the
Company anticipates loan prepayments in 1999 will be in amounts comparable to or
slightly less than 1998,
20
<PAGE> 23
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 "Overview - Loan Prepayment Considerations" and
" - Interest Rate and Prepayment Risk."
Expenses, other than interest expense, consist primarily of the
servicing and advisory fees paid to the Investment Manager and depreciation
related to the Acquired Amerihost Properties. The operating expenses borne by
the Investment Manager include compensation to the Company's officers (other
than stock options) and the cost of office space, equipment and other personnel
required for the Company's day-to-day operations. The expenses paid by the
Company include direct transaction costs incident to the acquisition and
disposition of investments, regular legal and auditing fees and expenses, the
fees and expenses of 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 the Investment Manager, 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 Company is required to pay an
annual fee ("the Lease Supervision Fee") of 0.70% of the initial cost of the
Amerihost Properties ($62.2 million). At present, the annual fee is
approximately $435,000. The IMA was amended on July 1, 1996, resulting in
investment management fees being reduced from 2.5% to 1.67% of loans and from
1.5% to 0.875% of loans in excess of beneficiaries' equity. Pursuant to the
IMAs, the Company incurred an aggregate of approximately $2.6 million in
management fees for the year ended December 31, 1998 including approximately
$218,000 for the Lease Supervision Fee. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1998,
$198,000 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 $466,000 of fees charged related to the acquisition of the
Amerihost Properties were capitalized as a cost of the properties. Investment
management fees were approximately $1.6 million for the year ended December 31,
1997. Of the total management fees paid or payable to the Investment Manager
during the year ended December 31, 1997, $172,500 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 $1,622,000
during the year ended December 31, 1997 to $1,789,000 during the year ended
December 31, 1998, or $167,000 (prior to offsetting direct costs related to the
origination of loans), or 10%, 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 $14.2
million (14%), from $104.1 million during the year ended December 31, 1997, to
$118.3 million during the year ended December 31, 1998. The average common
equity capital as defined in the IMA increased by $4.8 million (5%), from $88.8
million during the year ended December 31, 1997, to $93.6 million during the
year ended December 31, 1998.
Depreciation expense was $976,000 during the year ended December 31,
1998. This amount is attributable to depreciation of the Amerihost Properties,
acquired by the Company on June 30, 1998, pursuant to the sales/leaseback
agreement.
Legal and accounting fees increased by $17,000 (31%), from $55,000
during the year ended December 31, 1997, to $72,000 during the year ended
December 31, 1998.
General and administrative expenses increased by $48,000 (36%), from
$134,000 during the year ended December 31, 1997, to $182,000 during the year
ended December 31, 1998.
Write-off of transaction costs were $569,000 during the year ended
December 31, 1998. This expense is attributable to a one-time charge of $569,000
for costs during the year ended December 31, 1998 related to the termination of
the Supertel merger. See "Supertel Transaction" above. There were no such
charges for the year ended December 31, 1997.
Interest expense increased by $2.6 million (153%) from $1.7 million
during the year ended December 31, 1997 to $4.3 million during the year ended
December 31, 1998. The increase was primarily a result of the issuance of the
1998 Notes and borrowings pursuant to the Company's revolving credit facility.
21
<PAGE> 24
Interest expense during the year ended December 31, 1998 consisted
primarily of interest incurred on the 1996 Notes issued pursuant to the 1996
Private Placement (approximately $802,000), the 1998 Notes issued pursuant to
the 1998 Private Placement (approximately $2,105,000), the revolving credit
facility (approximately $1,069,000), amortization of deferred borrowing costs
(approximately $267,000) and interest incurred on borrower advances
(approximately $46,000). During the year ended December 31, 1997, interest
expense consisted of interest incurred on the 1996 Notes issued pursuant to the
1996 Private Placement (approximately $1,500,000), amortization of deferred
borrowing costs (approximately $95,000) and interest incurred on borrower
advances (approximately $83,000).
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996
The net income of the Company during the years ended December 31, 1997
and 1996, was $10.4 million and $7.2 million, or $1.66 and $1.51 per share,
respectively. Interest income-loans is dependent on the interest rates for the
Company's outstanding loans and the dollar volume of outstanding loans. Since
the Company borrows funds to generate loan origination, the Company's net income
is dependent upon the spread at which it borrows funds and the rate at which the
company loans those funds. See " - Interest Rate and Prepayment Risk." Over the
past several years, that spread has decreased. Consequently, the Company has
sought to increase its outstanding loan portfolio, its fees related to lending
operations and its revenues from new REIT-related activities in order to
increase net income. The Company's earnings per share during the years ended
December 31, 1997 and 1996 includes the effect of the issuance of 2,335,000 of
the Company's common shares of beneficial interest (the "Common Shares") issued
pursuant to the Offering in July 1996 and pursuant to stock issuances under the
Company's Dividend Reinvestment and Share Purchase Plan. Accordingly, the
Company's weighted average shares outstanding increased by 31%, from 4,755,289
during the year ended December 31, 1996 to 6,242,182 during the year ended
December 31, 1997.
Interest income - loans increased by $3.9 million (46%), from $8.5
million during the year ended December 31, 1996, to $12.4 million during the
year ended December 31, 1997. 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 of approximately $674,000
and $283,000 for the years ended December 31, 1997 and 1996, respectively. These
commitment fees are non-refundable fees, collected as part of the origination of
a loan. These fees, net of related expenses, are recognized over the period the
applicable loans are anticipated to be outstanding.
This $3.9 million increase in interest income-loans was primarily
attributable to an increase in the Company's outstanding loan portfolio during
the year ended December 31, 1997 as a result of the completion of the lending of
all proceeds from the Private Placement and the Offering. The average monthly
invested assets in loans to small businesses increased by $32.5 million (45%),
from $72.5 million during the year ended December 31, 1996, to $105.0 million
during the year ended December 31, 1997. The yield was increased during the year
ended December 31, 1997 as 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.
Interest and dividends - other investments decreased by $592,000 (48%),
from $1,235,000 during the year ended December 31, 1996, to $643,000 during the
year ended December 31, 1997. Interest and dividends - other investments is
primarily generated by the investment of the Company's available funds in
short-term investments pending the origination of loans with such funds and will
temporarily increase following completion of a financing by the Company. The
complete use of the financing proceeds may take between three months and one
year depending on the amount of the proceeds, availability of lending
opportunities and the Company's outstanding unfunded commitments. The proceeds
from the Private Placement in March 1996 and from the Offering in July 1996 were
initially invested in short-term investments and then used to make loans in
accordance with the Company's underwriting criteria. The average monthly
short-term investments of the Company decreased by $9.5 million (44%), from
$21.7 million during the year ended December 31, 1996, to $12.2 million during
the year ended December 31, 1997. The average yields on short-term investments
during the years ended December 31, 1997 and 1996 were approximately 5.3% and
5.7%, respectively.
22
<PAGE> 25
Other income increased by $407,000 (106%), from $385,000 during the
year ended December 31, 1996, to $792,000 during the year ended December 31,
1997. Other income consists of: (i) amortization of construction monitoring
fees, (ii) prepayment fees, (iii) late and other loan fees and (iv)
miscellaneous collections. The components of other income are primarily
attributable to lending activities. As a result, other income will generally
increase as the Company's lending activities increase. This increase in other
income was primarily attributable to an increase in income recognized from
prepayment fees of $383,000, from $87,000 during the year ended December 31,
1996 to $470,000 during the year ended December 31, 1997. During the year ended
December 31, 1997, approximately $18.3 million representing 18 loans were
prepaid in full. Prepayment fees result in on-time increases in the Company's
other income, but will result in a long-term reduction in income to the extent
the Company is unable to generate new loans with the proceeds of such
prepayments with interest rates equal to or greater than that of the loans
prepaid. The Company experienced a 732% increase in the dollar amount of prepaid
loans during 1997 as compared to 1996. The ability of a borrower 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."
Additionally, income recognized from the monitoring of construction projects in
process increased by $59,000, from $140,000 during the year ended December 31,
1996, to $199,000 during the year ended December 31, 1997. This increase was
offset by a decrease in income recognized from assumption, modification and
extension fees of $65,000, from $119,000 during the year ended December 31,
1996, to $54,000 during the year ended December 31, 1997.
Expenses, other than interest expense, consist primarily of the
servicing and advisory fees paid to the Investment Manager. The operating
expenses borne by the Investment Manager include compensation to PMC
Commercial's officers (other than stock options) and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses paid by the Company include direct transaction costs incident to
the acquisition and disposition of investments, regular legal and auditing fees
and expenses, the fees and expenses of PMC Commercial's Independent Trust
Managers, the costs of printing and mailing proxies and reports to shareholders
and the fees and expenses of the Company's custodian and transfer agent, if any.
The Company, rather than the Investment Manager, is also required to pay
expenses associated with any litigation and other extraordinary or nonrecurring
expenses. The IMA was amended on July 1, 1996, resulting in investment
management fees being reduced from 2.5% to 1.67% of loans and from 1.5% to
0.875% of loans in excess of beneficiaries' equity. Pursuant to the amended IMA,
the Company incurred an aggregate of approximately $1.6 million in management
fees for the year ended December 31, 1997. Of the total management fees paid or
payable to the Investment Manager during the year ended December 31, 1997,
$172,500 has been offset against commitment fees as a direct cost of originating
loans. Investment management fees were approximately $1.6 million for the year
ended December 31, 1996, $251,000 of which were incurred as a cost of the
Offering. Of the total management fees paid or payable to the Investment Manager
during the year ended December 31, 1996, $318,500 was offset against commitment
fees as a direct cost of originating loans and the $251,000 described above was
offset against additional paid-in capital. The average quarterly loans increased
by $31.6 million (44%), from $72.5 million during the year ended December 31,
1996, to $104.1 million during the year ended December 31, 1997.
Legal and accounting fees decreased by $2,000 (3%), from $57,000 during
the year ended December 31, 1996, to $55,000 during the year ended December 31,
1997.
General and administrative expenses increased by $17,000 (15%), from
$117,000 during the year ended December 31, 1996, to $134,000 during the year
ended December 31, 1997. This increase is primarily attributable to an increase
in costs related to printing and shareholder servicing expenses as a result of
the increased number of shareholders of record.
Interest expense during the year ended December 31, 1997 consisted of
interest incurred on the Notes issued pursuant to the Private Placement
(approximately $1.5 million), amortization of deferred borrowing costs
(approximately $95,000) and interest incurred on borrower advances
(approximately $83,000). During the year ended
23
<PAGE> 26
December 31, 1996, interest expense consisted of interest incurred on the Notes
issued pursuant to the Private Placement (approximately $1.6 million),
amortization of deferred borrowing costs (approximately $75,000) and interest
incurred on borrower advances (approximately $51,000). The decrease in interest
expense from $1.8 million during the year ended December 31, 1996 to $1.7
million during the year ended December 31, 1997 was primarily attributable to
the decrease in principal outstanding on the Notes issued pursuant to the
private placement.
As the Company is currently qualified as a REIT under the applicable
provisions of the Code, there are no provisions in the financial statements for
Federal income taxes.
CASH FLOW ANALYSIS
The Company generated $14.2 million and $7.0 million from operating
activities during the years ended December 31, 1998 and 1997, respectively. The
primary source of funds is the net income of the Company. The increase in source
of funds of $7.2 million (103%) was primarily due to several factors including
(i) an increase in net income of $1.0 million, from $10.4 million during the
year ended December 31, 1997 to $11.4 million during the year ended December 31,
1998, (ii) fluctuations in borrower advances which increased by $2.4 million,
from a use of $3.0 million during the year ended December 31, 1997, to a use of
$0.6 million during the year ended December 31, 1998, (iii) the change related
to "due to affiliates" which increased by $1.2 million, from a use of $0.3
million during the year ended December 31, 1997, to a source of $0.9 million
during the year ended December 31, 1998 and an increase in other liabilities,
from less than $100,000 during the year ended December 31, 1997 to $1.6 million
during the year ended December 31, 1998. The increase in other liabilities is
due to deposits, held by the Company for Amerihost, pursuant to the
sale/leaseback agreement (approximately $1.1 million) and prepaid lease income
from Amerihost ($0.5 million).
The Company had a net use of $81.1 million and $20.3 million from
investing activities during the years ended December 31, 1998 and 1997,
respectively. The increased use of funds of $60.8 million was due primarily to:
(i) the purchase of 26 motel properties from Amerihost for $62.2 million
exclusive of capitalized costs of approximately $0.5 million, and (ii) an
increase in the investment in restricted assets of $7.5 million during 1998
(primarily due to reserve requirements related to the 1998 Private Placement and
reserve deposits held by the Company relating to the Acquired Amerihost
Properties.) This increased use of funds was partially offset by an increase of
$6.3 million in principal collected, from $25.8 million during the year ended
December 31, 1997 to $32.1 million during the year ended December 31, 1998.
The Company had a source of funds of $67.1 million compared to a use of
funds of $12.6 million from financing activities during the years ended December
31, 1998 and 1997, respectively. During the year ended December 31, 1998, the
increased source of funds is primarily due to the issuance of $66.1 million in
loan backed fixed rate notes under the 1998 Partnership and an increase in net
borrowings of $28.2 million under the Company's revolving credit facility. The
Company's main use of funds from financing activities are the payment of
dividends as part of its requirements to maintain REIT status and the payment of
principal on notes payable. Dividends paid increased $1.4 million from $9.7
million during the year ended December 31, 1997, to $11.1 million during the
year ended December 31, 1998. This increase corresponds to the Company's
increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans 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.
At December 31, 1998, the Company had $0.2 million of cash and cash
equivalents and approximately $16.9 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 $5.3 million of loan commitments outstanding pertaining to
seven partially funded construction loans and three loan approvals of
approximately $5.4 million at December 31, 1998. The weighted average interest
rate on loan commitments at December 31, 1998 was 9.5%. These commitments are
made in the ordinary course of business and, in management's
24
<PAGE> 27
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, the Investment Manager will refer such
commitments to affiliates of the Company for which the Company will receive no
fees.
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 short-term credit facility as described below, (ii)
placement of long-term borrowings, (iii) issuance of debt securities, and/or
(iv) offering of additional equity securities, including Preferred Shares. 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. During March 1998, the Company temporarily suspended the optional cash
purchase portion of the DRP since the use of leverage is currently more cost
effective than the issuance of additional equity. Revisions are currently in
process which amend the calculation of the purchase price of the shares issued
related to open market purchases under the plan.
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 (i) 50% of the value
of the underlying loans collateralizing the borrowings plus (ii) 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 (ii) above) is limited to $20 million. At December 31, 1998, the
Company had $28.5 million of outstanding borrowings under the Revolver and $11.5
million available thereunder, as amended. At December 31, 1998 the aggregate
availability under the Revolver was $40 million. 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 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 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 Acquired 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 will have to fully utilize its $40 million revolving
credit facility, increase its revolving credit facility and/or may have to slow
the rate of increasing the outstanding loan portfolio.
In November 1998, the Company completed the 1998 Private Placement of
approximately $66.1 million of the 1998 Notes, issued pursuant to a rated
structured financing, which are collateralized by the 1998 Partnership's
commercial loan portfolio. The 1998 Private Placement resulted in net proceeds
to the Company of approximately $61.2 million, of which approximately $14.6
million were used to repay outstanding borrowings under the Revolver. Cash flow
on these leveraged funds is materially dependent on the spread between the rate
at which it borrowed these funds (6.37%) and the rate obtained on loan of these
funds (presently the 1998 Partnership's outstanding portfolio has a weighted
average coupon of approximately 10.6%).
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."
25
<PAGE> 28
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K
This Form 10-K 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-K 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.
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, the Company is engaged in assessing the Year 2000 issue with
significant suppliers.
The assessment process relating to the Company's loan receivable
servicing operations has commenced. In addition, the Company has initiated
formal communications with its significant suppliers to determine the extent to
which the Company 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 total project cost (while not considered to be material) has not yet been
determined. 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 the Company is devoting the necessary resources to
identify and resolve significant Year 2000 issues in a timely manner.
26
<PAGE> 29
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 years ended December 31, 1998 and 1997 was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net Income $11,371 $10,389
Add depreciation 976 --
------- -------
FFO $12,347 $10,389
======= =======
Weighted average shares 6,498 6,242
======= =======
</TABLE>
ITEM 7A. 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 $66.9 million at December 31, 1998. 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%, annualized interest expense would increase by approximately $570,000 on
the amount outstanding of $28.5 million at December 31, 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is hereby incorporated by
reference to the Company's Financial Statements beginning on page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual Meeting
of Shareholders to be held on May 12, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual Meeting
of Shareholders to be held on May 12, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual Meeting
of Shareholders to be held on May 12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to the Annual Meeting
of Shareholders to be held on May 12, 1999.
28
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements -
See index to Financial Statements set forth on page F-1 of
this Form 10-K.
(2) Financial Statement Schedules -
Schedule I - Condensed Financial Information of PMC Commercial
Trust (Parent Company Only)
Schedule III - Real Estate and Accumulated Depreciation
(3) Exhibits
See Exhibit Index beginning on page E-1 of this Form 10-K.
(b) Reports on Form 8-K:
None
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
PMC Commercial Trust
By: /s/ Lance B. Rosemore
----------------------------
Lance B. Rosemore, President
Dated March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ DR. ANDREW S. ROSEMORE Chairman of the Board of Trust March 30, 1999
-------------------------- Managers, Chief Operating
Dr. Andrew S. Rosemore Officer and Trust Manager
/s/ LANCE B. ROSEMORE President, Chief Executive March 30, 1999
-------------------------- Officer, Secretary and Trust
Lance B. Rosemore Manager (principal executive
officer)
/s/ BARRY N. BERLIN Chief Financial Officer (principal March 30, 1999
-------------------------- financial and accounting
Barry N. Berlin officer)
/s/ IRVING MUNN Trust Manager March 30, 1999
--------------------------
Irving Munn
/s/ ROY H. GREENBERG Trust Manager March 30, 1999
--------------------------
Roy H. Greenberg
/s/ NATHAN COHEN Trust Manager March 30, 1999
--------------------------
Nathan Cohen
/s/DR. IRA SILVER Trust Manager March 30, 1999
--------------------------
Dr. Ira Silver
/s/ DR. MARTHA GREENBERG Trust Manager March 30, 1999
--------------------------
Dr. Martha Greenberg
</TABLE>
30
<PAGE> 33
PMC COMMERCIAL TRUST
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................................................ F-2
Financial Statements:
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Income........................................... F-4
Consolidated Statements of Beneficiaries' Equity............................ F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
Report of Independent Accountants on Financial Statement Schedules............... F-19
Schedule I - Condensed Financial Information of PMC
Commercial Trust (Parent Company Only)........................................ F-20
Schedule III - Real Estate and Accumulated Depreciation.......................... F-23
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trust Managers
PMC Commercial Trust:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, beneficiaries' equity, and cash flows present
fairly, in all material respects, the financial position of PMC Commercial Trust
and its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 26, 1999
F-2
<PAGE> 35
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
INVESTMENTS:
Loans receivable, net .......................... $ 119,712 $ 109,132
Real estate investments, net ................... 61,774 --
Restricted investments ......................... 13,290 5,766
Cash equivalents ............................... 202 32
--------- ---------
TOTAL INVESTMENTS ................................ 194,978 114,930
--------- ---------
OTHER ASSETS:
Cash ........................................... 23 4
Interest receivable ............................ 786 654
Deferred borrowing costs, net .................. 637 280
Other assets, net .............................. 266 9
--------- ---------
TOTAL OTHER ASSETS ............................... 1,712 947
--------- ---------
TOTAL ASSETS ..................................... $ 196,690 $ 115,877
========= =========
LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Notes payable .................................. $ 95,387 $ 18,721
Dividends payable .............................. 2,967 2,749
Due to affiliates .............................. 1,232 344
Borrower advances .............................. 788 1,431
Unearned commitment fees ....................... 558 948
Interest payable ............................... 494 182
Other liabilities .............................. 1,827 260
--------- ---------
TOTAL LIABILITIES ................................ 103,253 24,635
--------- ---------
Commitments and contingencies
BENEFICIARIES' EQUITY:
Common shares of beneficial interest; authorized
100,000,000 shares of $0.01 par value;
6,520,037 and 6,392,518 shares issued and
outstanding at December 31, 1998 and 1997,
respectively .............................. 65 64
Additional paid-in capital ..................... 94,102 91,687
Cumulative net income .......................... 37,048 25,677
Cumulative dividends ........................... (37,778) (26,186)
--------- ---------
Total beneficiaries' equity ...................... 93,437 91,242
--------- ---------
TOTAL LIABILITIES AND BENEFICIARIES' EQUITY ...... $ 196,690 $ 115,877
========= =========
Net asset value per share ........................ $ 14.33 $ 14.27
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 36
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Interest income - loans .................................. $13,496 $12,378 $ 8,528
Lease income ............................................. 3,314 -- --
Interest and dividends - other investments ............... 321 643 1,235
Other income ............................................. 2,177 792 385
------- ------- -------
TOTAL REVENUES ............................................. 19,308 13,813 10,148
------- ------- -------
EXPENSES:
Interest ................................................. 4,289 1,726 1,805
Advisory and servicing fees to affiliate, net ............ 1,809 1,449 992
Depreciation ............................................. 976 -- --
Write-off of transaction costs ........................... 569 -- --
General and administrative ............................... 182 134 117
Legal and accounting fees ................................ 72 55 57
Provision for loan losses ................................ 40 60 --
------- ------- -------
TOTAL EXPENSES ............................................. 7,937 3,424 2,971
------- ------- -------
NET INCOME ................................................. $11,371 $10,389 $ 7,177
======= ======= =======
Weighted average shares outstanding ........................ 6,498 6,242 4,755
======= ======= =======
Basic and diluted earnings per share ....................... $ 1.75 $ 1.66 $ 1.51
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 37
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
COMMON
SHARES OF ADDITIONAL CUMULATIVE TOTAL
BENEFICIAL PAR PAID-IN NET CUMULATIVE BENEFICIARIES'
INTEREST VALUE CAPITAL INCOME DIVIDENDS EQUITY
---------- --------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 ............ 3,491,716 $ 35 $ 48,327 $ 8,111 $ (8,290) $ 48,183
Shares sold through
public offering, including
overallotments .................. 2,275,000 23 33,568 -- -- 33,591
Shares sold through
directed offering ............... 60,000 1 885 -- -- 886
Issuance costs ....................... -- -- (547) -- -- (547)
Shares issued through exercise of
stock options ................... 22,340 -- 234 -- -- 234
Shares issued through dividend
reinvestment and cash
purchase plan ................... 236,439 2 3,782 -- -- 3,784
Dividends ($1.55 per share) .......... -- -- -- -- (7,479) (7,479)
Net income ........................... -- -- -- 7,177 -- 7,177
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1996 .......... 6,085,495 61 86,249 15,288 (15,769) 85,829
Issuance costs ....................... -- -- (16) -- -- (16)
Shares issued through exercise of
stock options ................... 17,460 -- 237 -- -- 237
Shares issued through dividend
reinvestment and cash
purchase plan ................... 289,563 3 5,217 -- -- 5,220
Dividends ($1.65 per share) .......... -- -- -- -- (10,417) (10,417)
Net income ........................... -- -- -- 10,389 -- 10,389
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1997 .......... 6,392,518 64 91,687 25,677 (26,186) 91,242
Shares issued through exercise of
stock options ................... 16,408 -- 265 -- -- 265
Shares issued through dividend
reinvestment and cash
purchase plan ................... 111,111 1 2,150 -- -- 2,151
Dividends ($1.78 per share) .......... -- -- -- -- (11,592) (11,592)
Net income ........................... -- -- -- 11,371 -- 11,371
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1998 .......... 6,520,037 $ 65 $ 94,102 $ 37,048 $ (37,778) $ 93,437
========= ========= ========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 38
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 11,371 $ 10,389 $ 7,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ......................................... 976 -- --
Accretion of discount and fees ....................... (838) (820) (453)
Amortization of organization and borrowing costs ..... 267 103 83
Provision for loan losses ............................ 40 60 --
Commitment fees collected, net ....................... 590 569 1,270
Construction monitoring fees collected, net .......... 78 (4) 244
Changes in operating assets and liabilities:
Accrued interest receivable ...................... (132) (39) (205)
Other assets ..................................... (257) 18 7
Interest payable ................................. 312 (57) 183
Borrower advances ................................ (643) (2,971) 3,823
Due to affiliates ................................ 888 (281) (220)
Other liabilities ................................ (7,523) 27 152
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. (81,115) 6,994 12,061
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ............................................. (42,968) (43,129) (40,430)
Principal collected ...................................... 32,126 25,843 7,181
Purchase of real estate .................................. (62,750) -- --
Investment in restricted investments, net ................ (7,523) (3,007) (2,759)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ...................... (81,115) (20,293) (36,008)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ................. 2,132 5,038 38,286
Proceeds from issuance of notes payable ................. 66,100 -- 29,500
Payment of principal on notes payable ................... (17,669) (7,927) (2,852)
Net proceeds (payments) on Revolver ..................... 28,235 -- (7,920)
Payment of dividends .................................... (11,089) (9,744) (6,294)
Payment of borrowing costs .............................. (624) -- (450)
Payment of issuance costs ............................... -- (16) (547)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ 67,085 (12,649) 49,723
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 189 (25,948) $ 25,776
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 36 25,984 $ 208
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 225 $ 36 $ 25,984
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested .................................... $ 284 $ 419 $ 210
======== ======== ========
Dividends declared, not paid ............................ $ 2,967 $ 2,749 $ 2,495
======== ======== ========
Interest paid ........................................... $ 4,334 $ 1,687 $ 1,617
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 39
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Commercial Trust ("PMC Commercial") was organized in 1993, as a
Texas real estate investment trust. The shares of the Company are traded on the
American Stock Exchange (Symbol "PCC"). 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". The Company's
principal investment objective is to obtain current income from interest earned
on the loan portfolio, other related fee income from its lending activities and
rental income from property ownership. The Company's investments include the
ownership of commercial properties. To date, these investments have been in the
lodging industry. The Company's investment advisor is PMC Advisers, Ltd. ("PMC
Advisers" or the "Investment Manager"), an indirect subsidiary of PMC Capital,
Inc. ("PMC Capital"), a regulated investment company traded on the American
Stock Exchange (symbol "PMC"). The Company intends to maintain its qualified
status as a real estate investment trust ("REIT") for Federal income tax
purposes.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
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.
PRINCIPLES OF 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. All
intercompany transactions have been eliminated in consolidation.
LOANS RECEIVABLE, NET:
Loans receivable are carried at their outstanding principal balance
less any discounts, deferred fees net of related costs, and loan loss reserves.
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 when significant doubt exists as to the ultimate realization of the
loan. The 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. Management's evaluation
of the adequacy of the allowance is based on a review of the Company's
historical loss experience, known and inherent risks in the loan portfolio,
including adverse circumstances that may affect the ability of the borrower to
repay interest and/or principal and to the extent payment appears impaired, the
estimated value of collateral. Changes to the facts and circumstances of the
borrower, the lodging industry and the economy may require the establishment of
additional loan loss reserves in proportion to the potential loss.
Deferred fee revenue is included in the carrying value of loans
receivable and consists of non-refundable fees less certain direct loan
origination costs which are being recognized over the life of the related loan
as an adjustment of yield.
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
F-7
<PAGE> 40
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
utilizing a 35 year useful life. Furniture, fixtures and equipment ("FF&E")are
being depreciated over a seven year useful life to its estimated residual value.
Pursuant to the master lease agreement, the lessee is required to fund necessary
expenditures for FF&E over the term of the lease. At the termination of the
lease, the lessee is required to transfer the FF&E to the lessor in a
satisfactory working condition (estimated residual value). 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 property in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the 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 property and determine if the investment in the 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 property based on the
discounted cash flows. The Company does not believe that there are any current
facts or circumstances indicating impairment of any of its real estate
investments. Additionally, Amerihost guarantees the lease payment obligation of
Amerihost Inns.
DEFERRED BORROWING COSTS:
Costs incurred by the Company in connection with the issuance of notes
payable are being amortized over the life of the related obligation using the
effective interest method.
INCOME TAXES:
The Company intends to maintain its qualified status as a REIT under
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to remain qualified as a REIT under the Code, the Company must elect to be
a REIT and must satisfy various requirements in each taxable year, including,
among others, limitations on share ownership, asset diversification, sources of
income, and distribution of income. By qualifying, the Company will not be
subject to Federal income taxes to the extent that it distributes at least 95%
of its taxable income in the fiscal year. Management of the Company believes it
has satisfied the various requirements to remain qualified as a REIT. Since
inception, all of the Company's dividends have been paid out of ordinary income.
INTEREST INCOME:
Interest income is recorded on the accrual basis to the extent that
such amounts are deemed collectible. The Company's policy is to suspend the
accrual of interest income when a loan becomes 60 days delinquent.
LEASE INCOME:
The fixed lease payments are reported as income in accordance with the
terms of the lease agreements. In addition, the Company receives 2% of the
monthly room revenue of the Acquired Amerihost Properties. Such revenue is
reported as income as it becomes receivable from the Lessee.
CONSOLIDATED STATEMENT OF CASH FLOWS:
The Company generally considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents for the
purpose of the consolidated statement of cash flows.
CONCENTRATION OF CASH:
At various times during the year the Company maintains cash, cash
equivalents and restricted investments in accounts in excess of federally
insured limits with various financial institutions. The Company regularly
monitors the financial institutions and does not believe a significant credit
risk is associated with the deposits in excess of federally insured amounts.
RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to
current year presentation.
F-8
<PAGE> 41
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE:
The Company primarily originates loans: (i) to small business
enterprises that exceed the net worth, asset, income, number of employee or
other limitations applicable to the Small Business Administration ("SBA")
programs utilized by PMC Capital or (ii) in excess of $1.1 million to small
business enterprises without regard to SBA eligibility requirements. Such loans
are primarily collateralized by first liens on real estate and are subject to
the Company's underwriting criteria.
The principal amount of loans originated by the Company generally have
not exceeded 70% of the lesser of appraised value or cost of the real estate
collateral unless credit enhancements such as additional collateral or third
party guarantees were obtained. Loans originated or purchased by the Company
typically provide interest payments at fixed rates, although the Company may
also originate and purchase variable rate loans. Loans generally have maturities
ranging from five to 20 years. Most loans provide for scheduled amortization and
often have a balloon payment requirement. In most cases, borrowers are entitled
to prepay all or part of the principal amount subject to a prepayment penalty
depending on the terms of the loan.
During the years ended December 31, 1998, 1997 and 1996, the Company
closed loans to 27, 33 and 32 corporations, partnerships or individuals for
approximately $43.0 million, $43.1 million and $40.4 million and collected
commitment fees of approximately $0.9 million, $0.8 million, and $1.6 million,
respectively.
In connection with the origination of a loan, the Company charges a
commitment fee. In accordance with SFAS No. 91, this non-refundable fee, less
the direct costs associated with the origination, is deferred and is included as
a reduction of the carrying value of loans receivable. These net fees are being
recognized as income over the life of the related loan as an adjustment of
yield. The Company had approximately $1.8 million and $1.5 million in deferred
commitment fees at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, approximately 25% and 27%, respectively,
of the Company's loan portfolio consisted of loans to borrowers in Texas. No
other state had a concentration of 10% or greater at December 31, 1998 and 1997.
The Company's loan portfolio was approximately 97% and 96% concentrated in the
lodging industry at December 31, 1998 and 1997, respectively. There can be no
assurance that the Company will continue to experience the positive results it
has historically achieved from these lending activities or that market
conditions will enable the Company to maintain or increase this level of loan
concentration. Any economic factors that negatively impact the lodging industry
could have a material adverse effect on the business of the Company.
Additionally, a decline in economic conditions in Texas may adversely affect the
Company. At December 31, 1998 and 1997 the Company had established a loan loss
reserve of $100,000 and $60,000, respectively.
NOTE 3. CASH EQUIVALENTS:
At December 31, 1998 and 1997, cash equivalents in the form of money
market funds were $202,000 and $32,000, respectively.
NOTE 4. RESTRICTED INVESTMENTS:
Restricted investments maintained pursuant to the structured financings
completed in March 1996 and June 1998 (see Note 13) include collection accounts
which remits balances to the noteholders and reserve account balances held as
collateral on behalf of the noteholders. The collection and reserve accounts
(which consisted of cash and liquid money market funds) were approximately $7.6
million and $4.4 million, respectively, at December 31, 1998. At December 31,
1997, the collection and reserve accounts (which consisted of cash and liquid
money market funds) were approximately $3.7 million and $1.9 million,
respectively.
Restricted investments maintained pursuant to the sale/leaseback
agreement with Amerihost completed in June 1998 includes an escrow account and a
capital expenditures account of approximately $1.2 million at December 31, 1998.
The
F-9
<PAGE> 42
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRICTED INVESTMENTS: (CONTINUED)
escrow account includes a deposit of two months' base rent made by Amerihost.
The capital expenditures account includes a deposit made by Amerihost for future
capital expenditures required to maintain the real estate investments. Amerihost
deposits an amount equal to 2% of the monthly room revenues, which is recorded
as revenue by the Company, into the capital expenditures' account. As capital
expenditures are made by Amerihost and approved by the Company, the Company
reimburses Amerihost for the approved capital expenditures from the capital
expenditures account. There were no such amounts maintained at December 31,
1997.
Additionally, the Company maintains funds ($101,000 at December 31,
1998 and 1997) pursuant to a marketing agreement (the "Agreement") which
requires funds equal to the greater of 2% of all loan commitments made under the
Agreement or $100,000 to be held by the Company (the "Reserve Account") for the
purpose of collateralizing the payment and performance of such loans and pay
losses, if any, suffered by the Company on such loans. To the extent that the
Reserve Account balance exceeds the amount required, such excess amount will be
reimbursed by the Company on a quarterly basis.
NOTE 5. REAL ESTATE INVESTMENTS:
On May 21, 1998, the Company and Amerihost entered into an agreement
pursuant to which the Company agreed to acquire and leaseback 30 motel
properties. Pursuant to the sale/leaseback agreement, the Company leases the
acquired 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.
On June 30, 1998, the Company completed the acquisition of 26 of the
Amerihost properties (the "Acquired Amerihost Properties") for an aggregate
purchase price of $62.2 million. The Acquired Amerihost Properties contain an
aggregate of 1,575 rooms. The aggregate amount of the lease payments to be
received by the Company for the Acquired Amerihost Properties is $6.22 million
per year ("Base Rent"), plus 2% of gross revenues as defined in the master lease
agreement, subject to CPI increases as described above. Amerihost guarantees the
lease payment obligation of Amerihost Inns.
Subsequent to year end, the Company acquired the remaining four
properties for an aggregate purchase price of $10.8 million. The properties
contain an aggregate of 259 rooms. The aggregate amount of the lease payments to
be received by the Company for the four properties is $1.1 million per year,
subject to CPI increases as described above. Accordingly, the aggregate Base
Rent payment for the 30 acquired Amerihost properties will increase to $7.3
million per year subject to the CPI increases as described above, plus 2% of the
gross room revenues as defined in the master lease agreement. The Company has
assumed debt related to the four properties that aggregates $6.8 million with a
weighted average interest rate of 8.0%. This debt is amortized over a 20 year
period and has maturities of between 15 and 20 years. The debt assumed has
restrictive provisions which provide substantial penalties if paid prior to
maturity.
Real estate investments consist of the Company's investment in the
acquired Amerihost properties, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Land $ 6,900
Building and improvements 51,126
Furniture, fixtures and equipment 4,724
--------
62,750
Accumulated depreciation (976)
--------
$ 61,774
========
</TABLE>
F-10
<PAGE> 43
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. DUE TO AFFILIATES:
The loans of the Company are managed by 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 IMAs, 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 the Investment Manager 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 the Investment Manager for
providing services relating to the Amerihost leases and charged a fee relating
to the acquisition of the Amerihost Properties. Fees for the three years in the
period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Total Fees incurred $2,640 $1,622 $1,561
Less: Capitalized as cost
of originating loans 198 173 319
Cost of equity capital -- -- 250
Cost of structured financing 167 -- --
Cost of property acquisition 466 -- --
------ ------ ------
Investment management fee expense $1,809 $1,449 $ 992
====== ====== ======
</TABLE>
NOTE 7. BORROWER ADVANCES AND CONSTRUCTION LENDING:
The Company finances projects during the construction phase. At
December 31, 1998 and 1997, the Company was in the process of funding
approximately $8.7 million and $24.2 million in construction projects,
respectively, of which $5.3 million and $8.6 million, respectively, remained
unfunded at the respective year end. As part of the monitoring process to verify
that the borrowers' cash equity is utilized for its intended purpose, the
Company receives funds from the borrowers and releases funds upon presentation
of appropriate supporting documentation. At December 31, 1998 and 1997, the
Company had approximately $0.8 million and $1.4 million, respectively, in funds
held on behalf of borrowers, which is included as a liability in the
accompanying consolidated balance sheets.
NOTE 8. NET INCOME PER SHARE:
The weighted average number of common shares of beneficial interest
outstanding were 6,497,924; 6,242,182, and 4,755,289 for the periods ended
December 31, 1998, 1997 and 1996, respectively. For purposes of calculating
diluted earnings per share, the weighted average shares outstanding were
increased by 5,512; 9,943, and 8,488 for the effect of stock options during the
years ended December 31, 1998, 1997 and 1996, respectively (see Note 11).
NOTE 9. BENEFICIARIES' EQUITY:
On July 2, 1996, the Company completed the sale of two million of its
Common Shares in a public offering and 60,000 Common Shares directly to certain
officers and trust managers of the Company. The net proceeds to the Company from
these issuances were $30.4 million. In July 1996, the Company sold an additional
275,000 Common Shares pursuant
F-11
<PAGE> 44
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BENEFICIARIES' EQUITY: (CONTINUED)
to the exercise of the over-allotment option by the underwriters of the
offering, for additional net proceeds of approximately $4.1 million
(collectively with the previous issuances, the "Offering"). The proceeds of the
Offering were used to originate additional loans in accordance with the
Company's underwriting criteria. In connection with the Offering, the Company
incurred approximately $547,000 in costs which were offset against additional
paid-in capital.
As part of the requirements of qualifying for REIT status under the
Code, the Company must distribute to its shareholders at least 95% of its income
for Federal income tax purposes ("Taxable Income") within established time
requirements of the Code. If these requirements are not met, the Company will be
subject to Federal income taxes and/or excise taxes. As a result of a timing
difference for the recognition of income with respect to fees collected at the
inception of originating loans, the Company's Taxable Income exceeds net income
in accordance with generally accepted accounting principles. In order to prevent
incurring any tax liability, the Company has declared or distributed the
required amount of taxable income as dividends to its shareholders. For Federal
income tax purposes, these dividends do not represent a return of capital.
NOTE 10. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN:
The Company has implemented a dividend reinvestment and cash purchase
plan (the "Plan"). Participants in the Plan have the option to reinvest all or a
portion of dividends received. The purchase price of the shares is 100% of the
average of the high and low price of the common stock as published for the five
trading days immediately prior to the dividend record date or prior to the
optional cash payment purchase date, whichever is applicable. During the years
ended December 31, 1998, 1997 and 1996, 111,111; 289,563, and 236,439 shares,
respectively, were issued pursuant to the plan.
NOTE 11. SHARE OPTION PLANS:
The Company has two stock-based compensation plans, which are described
below. The Company applies Accounting Principles Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for its stock-based compensation
plans. In 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") was issued which, if fully adopted by the Company, would change the
methods the Company applies in recognizing the cost of its stock-based
compensation plans. Adoption of the cost recognition provisions of SFAS No. 123
is optional and the Company has decided not to elect these provisions of SFAS
No. 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and
are presented below.
The Company has two stock-based compensation plans in the form of the
1993 Employee Share Option Plan (the "Employee Plan") and the Trust Manager
Share Option Plan (the "Trust Manager Plan"), referred to collectively as the
"Stock Option Plans." Pursuant to the Stock Option Plans, the Company is
authorized to grant stock options up to an aggregate of 6% of the total number
of Common Shares outstanding at any time (a maximum of 391,202 shares at
December 31, 1998) as incentive stock options (intended to qualify under Section
422 of the Internal Revenue code of 1986, as amended) and/or as options that are
not intended to qualify as incentive stock options. In 1998, 1997, and 1996 the
Company granted both qualified and nonqualified stock options under the Stock
Option Plans.
Only the trust managers who are not employees of PMC Capital or the
Investment Manager (the "Non-employee Trust Managers") are eligible to
participate in the Trust Managers Plan. The Trust Managers Plan is a
nondiscretionary plan pursuant to which options to purchase 2,000 shares are
granted to each Non-employee Trust Manager on the date such trust manager takes
office. In addition, options to purchase 1,000 shares are granted each year
thereafter on the anniversary of the date the trust manager took office so long
as such trust manager is re-elected to serve as a trust manager. In 1997, the
plan was amended so that the non-employee Trust Managers receive options to
purchase 1,000 shares on June 1 of each year. Such options will be exercisable
at the fair market value of the shares on the date of grant. The options granted
under the Trust Managers Plan become exercisable one year after date of grant
and expire if not exercised on the
F-12
<PAGE> 45
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SHARE OPTION PLANS: (CONTINUED)
earlier of (i) 30 days after the option holder no longer holds office as an
Non-employee Trust Manager for any reason or (ii) within five years after date
of grant. The number of shares exercisable under the Trust Managers Plan at
December 31, 1998 and 1997 were 23,000 and 19,000, respectively.
The Stock Option Plans provide that the exercise price of any stock
option may not be less than the fair market value of the Common Stock on the
date of grant. All stock options granted in 1998, 1997 and 1996 have an exercise
price equal to the fair market value of the underlying stock as of the date of
grant and a contractual term of five years. Of the total options outstanding,
10,500 options granted in December 1998 fully vest in January 2000 and 12,000
options granted in December 1997 fully vest in January 1999. The remainder fully
vest on the first anniversary date of grant. The Company granted 54,850; 57,250,
and 40,350 options during the years ended December 31, 1998, 1997 and 1996,
respectively. As of December 31, 1998, 223,420 share options had been granted
since the inception of the plan. In accordance with APB No. 25, the Company has
not recognized compensation expense for the stock options granted in 1998, 1997
and 1996.
A summary of the status of the Company's stock options as of December
31, 1998, 1997 and 1996 and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ------------------------ -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1 ................ 109,921 $ 17.81 78,529 $ 15.83 72,315 $ 13.43
Granted .............................. 54,850 $ 18.00 57,250 $ 19.41 40,350 $ 16.79
Exercised ............................ (16,940) $ 16.20 (23,358) $ 15.19 (27,846) $ 11.88
Forfeited and expired ................ (4,450) $ 19.32 (2,500) $ 16.68 (6,290) $ 11.88
------- ------- ------
Outstanding December 31 .............. 143,381 $ 18.02 109,921 $ 17.81 78,529 $ 15.83
======= ======= ======
Exercisable at December 31 ........... 78,531 $ 17.83 40,821 $ 15.84 21,239 $ 14.08
======= ======= ======
Weighted-average fair value of
options granted during the year ... $ 0.62 $ 1.09 $ 1.00
======= ======= ======
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1998, 1997 and 1996: dividend yield
of 9%; expected volatility of 13.27% for 1998, 15.78% for 1997 and 16.26% for
1996, respectively; risk-free interest rates of 4.52%, 5.78%, and 5.93%,
respectively; and the expected lives of options are assumed to be 3 years, 3
years, and 3.35 years, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ------------------------------------
NUMBER WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACT LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- --------------- ------------ ------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$11.75 to $15.00 6,031 0.82 $13.12 4,331 $13.61
$15.75 to $19.88 137,350 4.04 $18.25 74,200 $18.08
- ---------------- ------- ------
$11.75 to $19.88 143,381 3.90 $18.02 78,531 $17.83
======= ======
</TABLE>
F-13
<PAGE> 46
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SHARE OPTION PLANS: (CONTINUED)
The pro forma effects on net income and earnings per share for 1998,
1997 and 1996 from compensation expense computed pursuant to SFAS No. 123 is as
follows (in thousands, except per share date):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- -------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
SFAS No. 123 Charge $ -- $ 56 $ -- $ 43 $ -- $ 20
APB No. 25 Charge $ -- $ -- $ -- $ -- $ -- $ --
Net Income $ 11,371 $11,315 $ 10,389 $10,346 $ 7,177 $ 7,157
Basic and Diluted Earnings
Per Share $ 1.75 $ 1.74 $ 1.66 $ 1.66 $ 1.51 $ 1.51
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
NOTE 12. 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 $11.6 million of loan commitments outstanding to 14 corporations,
partnership or individuals predominantly in the lodging industry at December 31,
1998. The weighted average contractual interest rate on these loan commitments
at December 31, 1998 was 9.5%. In addition, the Company had approximately $5.3
million of loan commitments outstanding on 7 partially funded construction loans
at December 31, 1998. 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.
NOTE 13. 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 $40
million or an amount equal to the sum of (i) 50% of the value of the underlying
property collateralizing the borrowings plus (ii) 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 (ii) above) is limited to $20 million. At December 31, 1998, the Company
had $28.5 million in debt outstanding under the credit facility and $11.5
million. At December 31, 1997, the Company had $300,000 outstanding under the
credit facility with availability of an additional $19.7 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 December 31,
1998, 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 December 31, 1998 the Company was in compliance
with all covenants of this facility.
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
F-14
<PAGE> 47
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. NOTES PAYABLE: (CONTINUED)
Notes, Series 1996-1 (the "1996 Notes"). 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 December
31, 1998, approximately $15.2 million of those loans remained outstanding. The
Company, through PMC Advisers, services the loans sold to the 1996 Partnership.
In connection with the 1996 Private Placement, the 1996 Notes were given a
rating of "AA" by Duff & Phelps Credit Rating Co. 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 Company,
therefore, 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. 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 Company used approximately $10.3
million of such proceeds to pay down outstanding borrowings under its credit
facility and the remainder to originate loans in accordance with its
underwriting criteria. At December 31, 1998, the Company had utilized all
proceeds from the 1996 Private Placement. 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 December 31, 1998
was $6.0 million.
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"). 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 December 31, 1998,
approximately $65.2 million of those loans remained outstanding. The Company,
through PMC Advisers, services the loans sold to the 1998 Partnership. In
connection with this transaction, the 1998 Notes were given a rating of "Aaa" by
Moody's Investors Service, Inc. Accordingly, if the 1998 Partnership fails to
pay the 1998 Notes, the sole recourse of the holders of the 1998 Notes is
against the assets of the 1998 Partnership. The Company, therefore, has no
obligation to pay the 1998 Notes nor do the holders of the 1998 Notes have any
recourse against the assets of the Company. The net proceeds from the issuance
of the 1998 Notes (approximately $46.5 million after giving effect to costs of
approximately $400,000, repayment of certain indebtedness related to the
contributed loans of approximately $14.6 million, a $2.2 million initial reserve
deposit held by the trustee as collateral and a deposit of $2.4 million
representing collections or prepayments on the underlying loans due to the
holders of the 1998 Notes) were distributed to the Company in accordance with
its interest in the 1998 Partnership. The Company utilized these proceeds to
help fund the acquisition of the Acquired Amerihost Properties. 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 December 31, 1998 was $60.8 million. All principal collected on
the underlying 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.
The Company receives distributions from the 1996 Partnership and 1998
Partnership. Pursuant to the Company's Declaration of Trust, distributions of
the net assets of the Company's wholly-owned subsidiaries are limited. As of
December 31, 1998, the dividends available for distribution from the 1996
Partnership and the 1998 Partnership were approximately $119,000 and $431,000,
respectively, which were distributed to the Company in January 1999.
F-15
<PAGE> 48
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by SFAS No. 107 differ from the
carrying amounts of the financial assets and liabilities primarily as a result
of the effects of discounting future cash flows. Considerable judgement is
required to interpret market data and develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange or the amount
that ultimately will be realized by the Company upon maturity or disposition.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Loans receivable, net $119,712 $122,948 $109,132 $111,548
Cash and cash equivalents 225 225 36
Restricted investments 13,290 13,290 5,766 5,766
LIABILITIES:
Notes payable 95,387 94,061 18,721 18,856
</TABLE>
Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent loans
on the estimation of the fair values described above is not considered
to have a material effect and accordingly, delinquent loans have been
disregarded in the valuation methodologies employed.
Cash and cash equivalents: The carrying amount is a reasonable
estimation of fair value.
Restricted Investments: The carrying amount is a reasonable estimation
of fair value.
Notes payable: The estimated fair value is based on present value
calculation based on prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.
F-16
<PAGE> 49
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. QUARTERLY FINANCIAL DATA: (UNAUDITED)
The following represents selected quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring adjustments) necessary for fair presentation.
1998
- --------------------------------------------------------------------------------
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Earnings Per
Revenues Net Income Share
-------- ---------- ------------
<S> <C> <C> <C>
First Quarter ...... $ 3,504 $ 2,655 $0.41
Second Quarter ..... 3,672 2,707 0.42
Third Quarter ...... 5,952 3,215 0.49
Fourth Quarter ..... 6,180 2,794 0.43
------- ------- -----
$19,308 $11,371 $1.75
======= ======= =====
</TABLE>
1997
- --------------------------------------------------------------------------------
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Earnings Per
Revenues Net Income Share
-------- ---------- ------------
<S> <C> <C> <C>
First Quarter ...... $ 3,165 $ 2,324 $0.38
Second Quarter ..... 3,733 2,820 0.45
Third Quarter ...... 3,425 2,608 0.42
Fourth Quarter ..... 3,491 2,637 0.41
------- ------- -----
$13,813 $10,389 $1.66
======= ======= =====
</TABLE>
NOTE 16. BUSINESS SEGMENTS:
Operating results and other financial data are presented for the
principal business segments of the Company for the year ended December 31, 1998.
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, (ii) the Property Division which owns commercial properties in
the lodging industry and (iii) certain unallocated transaction costs. For the
years ended December 31, 1997 and 1996 the Company operated a single
F-17
<PAGE> 50
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. BUSINESS SEGMENTS: (CONTINUED)
business segment, and, accordingly, no separate segment disclosures are
necessary. The Company's business segment data for the year ended December 31,
1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
LENDING PROPERTY UNALLOCATED
TOTAL DIVISION DIVISION COSTS (1)
-------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Interest income-loans and other ...................... $ 15,994 $ 15,994 $ -- $ --
Lease income ......................................... 3,314 -- 3,314 --
-------- -------- -------- --------
Total ............................................. 19,308 15,994 3,314 --
-------- -------- -------- --------
Expenses:
Interest (2) ......................................... 4,289 3,222 1,067 --
Depreciation ......................................... 976 -- 976 --
Advisory and servicing fees .......................... 1,809 1,591 218 --
Other ................................................ 863 294 -- 569
-------- -------- -------- --------
Total ............................................. 7,937 5,107 2,261 569
-------- -------- -------- --------
Net income (loss) ....................................... $ 11,371 $ 10,887 $ 1,053 $ (569)
======== ======== ======== ========
Total assets ........................................... $196,690 $133,688 $ 63,002 $ --
======== ======== ======== ========
</TABLE>
- --------------------
(1) The unallocated costs include the one-time charge of $569,000 relating to
certain merger costs (see Note 17 below.)
(2) The Company allocates interest expense based on the relative total assets
of each division.
NOTE 17. CANCELLATION OF PROPOSED MERGER:
On June 3, 1998, the Company entered into an Agreement and Plan of
Merger with Supertel Hospitality, Inc. ("Supertel") pursuant to which Supertel
would have merged with and into the Company, subject to the satisfaction of
certain conditions to closing. On October 15, 1998, the Company announced that
the Company's Board of Trust Managers and the Supertel Board of Directors agreed
to terminate the merger agreement between the two companies. During the year
ended December 31, 1998, the Company expensed all merger related costs. Included
in expenses is the one-time charge of $569,000 (or $.09 per share) relating to
such merger costs.
F-18
<PAGE> 51
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Trust Managers
PMC Commercial Trust:
Our audits of the consolidated financial statements referenced in our report
dated February 26, 1999, appearing on page F-2 of the 1998 Form 10-K also
included an audit of the financial statement schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 26, 1999
F-19
<PAGE> 52
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PMC COMMERCIAL TRUST (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(In thousands)
<TABLE>
<S> <C>
ASSETS
Investments:
Loans receivable, net .................................. $ 43,000
Cash and cash equivalents .............................. 225
Restricted investments ................................. 1,329
Investment in subsidiaries ............................. 20,382
Due from subsidiaries .................................. 1,527
Real property investments, net ......................... 61,774
Other assets, net ...................................... 1,246
--------
Total assets ............................................. $129,483
========
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities:
Notes payable .......................................... $ 28,535
Due to affiliates ...................................... 1,232
Other liabilities ...................................... 6,279
--------
Total liabilities ........................................ 36,046
--------
Total beneficiaries' equity .............................. 93,437
--------
Total liabilities and beneficiaries' equity .............. $129,483
========
</TABLE>
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<S> <C>
Revenues:
Interest income - loans ................................ $ 7,324
Lease income ........................................... 3,314
Equity in income of subsidiaries ....................... 4,722
Other income ........................................... 1,042
-------
Total revenues ........................................... 16,402
-------
Expenses:
Interest ............................................... 1,383
Advisory and servicing fees to affiliate, net .......... 1,809
Depreciation ........................................... 976
General and administrative and other ................... 863
-------
Total expenses ........................................... 5,031
-------
Net income ............................................... $11,371
=======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED FINANCIAL STATEMENTS.
F-20
<PAGE> 53
SCHEDULE I (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 11,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................... 976
Equity in income of subsidiaries, net ............ (4,722)
Changes in operating assets and liabilities:
Other assets .................................. (469)
Due to affiliates ............................. 1,423
Other liabilities ............................. 590
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 9,169
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries ............................... (9,761)
Loans contributed to subsidiaries ........................ 40,758
Purchase of real property ................................ (62,750)
Investment in restricted investments, net ................ (1,227)
--------
NET CASH USED IN INVESTING ACTIVITIES ...................... (32,980)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ................. 2,132
Payment of dividends to parent .......................... 4,722
Proceeds from revolving credit facility, net ............ 28,235
Payment of dividends .................................... (11,089)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 24,000
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 189
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 36
--------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 225
========
SUPPLEMENTAL DISCLOSURES:
Dividends reinvested .................................... $ 284
========
Dividends declared, not paid ............................ $ 2,967
========
Interest paid ........................................... $ 1,324
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED FINANCIAL STATEMENTS.
F-21
<PAGE> 54
SCHEDULE I (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF PMC COMMERCIAL TRUST (PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
(In thousands)
NOTE 1. CONDENSED FINANCIAL INFORMATION:
The condensed financial information as to financial position, cash
flow, and results of operations of PMC Commercial Trust (Parent
Company Only, the "Parent") is presented above. This financial
information includes the Parent's investment in its subsidiaries as
a single financial statement line. The subsidiaries include the
Parent's investment in PMC Commercial Corp., PMC Commercial Limited
Partnership, PMC Commercial Trust, Ltd. 1998-1 and PMCT Corp.
1998-1, accounted for on the equity method.
NOTE 2. ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES:
As of December 31, 1998 the following adjustments to the consolidated
balance sheet were made to present the Parent Company Only balance
sheet of PMC Commercial Trust:
<TABLE>
<CAPTION>
Increase(Decrease)
------------------
<S> <C>
ASSETS:
Loans receivable, net........... $ (76,712)
Restricted investments.......... $ (11,961)
Investments in subsidiaries..... $ 20,382
Due from subsidiaries........... $ 1,527
Other assets, net............... $ (443)
LIABILITIES:
Notes payable................... $ (66,852)
Other liabilities............... $ (355)
</TABLE>
For the year ended December 31, 1998 the following adjustments to the
consolidated statement of income were made to present the Parent
Company Only statement of income of PMC Commercial Trust:
<TABLE>
<CAPTION>
Increase(Decrease)
------------------
<S> <C>
Interest income - loans............... $ (6,172)
Equity in earnings of subsidiaries ... $ 4,722
Other income.......................... $ (1,456)
Interest expense...................... $ (2,906)
</TABLE>
NOTE 3. Distributions of Subsidiaries:
Pursuant to the Company's Declaration of Trust, distributions of the
net assets of the Company's wholly-owned subsidiaries are limited.
During the year ended December 31, 1998, the amount of dividends
paid was approximately $4.7 million.
F-22
<PAGE> 55
SCHEDULE III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST ACQUISITION
=----------------------------- ----------------------------------
Building Furniture Building Furniture
and and and and
Description of Property Land Improvements Fixtures Land Improvements Fixtures
- ----------------------- ---- ------------ -------- ---- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
AMERIHOST HOTELS:
Anderson, CA $ 366 $ 1,872 $ 183 $ -- $ -- $ --
Ashland, OH 215 2,626 185 -- -- --
Coopersville ,MI 242 1,999 180 -- -- --
Eagles Landing, GA 325 1,815 180 -- -- --
Grand Rapids-N, MI 221 2,323 180 -- -- --
Grand Rapids-S, MI 368 2,173 183 -- -- --
Grove City, PA 263 2,480 183 -- -- --
Hudsonville, MI 326 2,215 183 -- -- --
Jackson, TN 403 1,936 183 -- -- --
Kimberly, WI 241 1,991 189 -- -- --
LaGrange, GA 263 1,679 177 -- -- --
Mansfield, OH 293 1,646 180 -- -- --
McKinney, TX 273 2,066 183 -- -- --
Monroe, MI 273 2,060 189 -- -- --
Mosinee, WI 140 1,416 159 -- -- --
Mt. Pleasant, IA 179 1,851 189 -- -- --
Port Huron, MI 263 2,076 183 -- -- --
Rochelle, IL 221 2,017 183 -- -- --
Shippensburg, PA 252 1,888 180 -- -- --
Smyrna, GA 290 1,749 180 -- -- --
Storm Lake, IA 220 1,716 183 -- -- --
Tupelo, MS 236 1,901 183 -- -- --
Warrenton, MO 291 2,143 189 -- -- --
Wooster - E, OH 171 1,673 174 -- -- --
Wooster - N, OH 263 1,575 180 -- -- --
Yreka, CA 302 2,240 183 -- -- --
------ ------- ------ ----- ----- -----
$6,900 $51,126 $4,724 $ -- $ -- $ --
====== ======= ====== ===== ===== =====
</TABLE>
F-23
<PAGE> 56
SCHEDULE III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED AT
CLOSE OF PERIOD
-----------------------------------------
Building Furniture
and and
Description of Property Land Improvements Fixtures Total
- ----------------------- ---- ------------ -------- -----
<S> <C> <C> <C> <C>
AMERIHOST HOTELS:
Anderson, CA $ 366 $ 1,872 $ 183 $ 2,421
Ashland, OH 215 2,626 185 3,026
Coopersville, MI 242 1,999 180 2,421
Eagles Landing, GA 325 1,815 180 2,320
Grand Rapids-N, MI 221 2,323 180 2,724
Grand Rapids-S, MI 368 2,173 183 2,724
Grove City, PA 263 2,480 183 2,926
Hudsonville, MI 326 2,215 183 2,724
Jackson, TN 403 1,936 183 2,522
Kimberly, WI 241 1,991 189 2,421
LaGrange, GA 263 1,679 177 2,119
Mansfield, OH 293 1,646 180 2,119
McKinney, TX 273 2,066 183 2,522
Monroe, MI 273 2,060 189 2,522
Mosinee, WI 140 1,416 159 1,715
Mt. Pleasant, IA 179 1,851 189 2,219
Port Huron, MI 263 2,076 183 2,522
Rochelle, IL 221 2,017 183 2,421
Shippensburg, PA 252 1,888 180 2,320
Smyrna, GA 290 1,749 180 2,219
Storm Lake, IA 220 1,716 183 2,119
Tupelo, MS 236 1,901 183 2,320
Warrenton, MO 291 2,143 189 2,623
Wooster - E, OH 171 1,673 174 2,018
Wooster - N, OH 263 1,575 180 2,018
Yreka, CA 302 2,240 183 2,725
------- --------- --------- --------
$ 6,900 $ 51,126 $ 4,724 $ 62,750
======= ========= ========= ========
</TABLE>
F-24
<PAGE> 57
SCHEDULE III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Net
Depreciation - Book Value - Life upon
Building and Building and Which
Improvements; Improvements Depreciation
Furniture and Furniture and Date of Date of in Statement
Description of Property Fixtures Fixtures Construction Acquisition Is Computed
----------------------- ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Anderson, CA $ 35 $ 2,386 01/19/97 06/30/98 7 - 35 years
Ashland, OH 47 2,979 08/09/96 06/30/98 7 - 35 years
Coopersville, MI 38 2,383 01/09/96 06/30/98 7 - 35 years
Eagles Landing, GA 35 2,285 08/08/95 06/30/98 7 - 35 years
Grand Rapids-N, MI 42 2,682 07/05/95 06/30/98 7 - 35 years
Grand Rapids-S, MI 41 2,683 06/11/97 06/30/98 7 - 35 years
Grove City, PA 45 2,881 04/24/97 06/30/98 7 - 35 years
Hudsonville, MI 42 2,682 11/24/97 06/30/98 7 - 35 years
Jackson, TN 38 2,484 04/01/98 06/30/98 7 - 35 years
Kimberly, WI 38 2,383 06/30/97 06/30/98 7 - 35 years
LaGrange, GA 33 2,086 03/01/95 06/30/98 7 - 35 years
Mansfield, OH 33 2,086 11/19/94 06/30/98 7 - 35 years
McKinney, TX 39 2,483 01/06/97 06/30/98 7 - 35 years
Monroe, MI 39 2,483 09/19/97 06/30/98 7 - 35 years
Mosinee, WI 28 1,687 04/30/93 06/30/98 7 - 35 years
Mt. Pleasant, IA 36 2,183 07/02/97 06/30/98 7 - 35 years
Port Huron, MI 40 2,482 07/01/97 06/30/98 7 - 35 years
Rochelle, IL 39 2,382 03/07/97 06/30/98 7 - 35 years
Shippensburg, PA 36 2,284 08/09/96 06/30/98 7 - 35 years
Smyrna, GA 34 2,185 01/08/96 06/30/98 7 - 35 years
Storm Lake, IA 35 2,084 03/13/97 06/30/98 7 - 35 years
Tupelo, MS 37 2,283 07/25/97 06/30/98 7 - 35 years
Warrenton, MO 41 2,582 11/07/97 06/30/98 7 - 35 years
Wooster - E, OH 33 1,985 01/18/94 06/30/98 7 - 35 years
Wooster - N, OH 31 1,987 10/21/95 06/30/98 7 - 35 years
Yreka, CA 41 2,684 08/04/97 06/30/98 7 - 35 years
--------- --------
$ 976 $ 61,774
========= ========
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED: ACCUMULATED DEPRECIATION:
--------------------- -------------------------
TOTALS
------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 ........................... $ - Balance at January 1, 1998 ...................... $ -
--------
Additions during period:
Acquisitions through foreclosure .. $ - Depreciation expense during the period ........ 976
--------
Other Acquisitions ................ 62,750
--------
Improvements, etc ................. - Deductions during period:
--------
Other (describe) .................. - $ 62,750 Assets sold or written-off during the period .. -
-------- -------- ------
Balance at December 31, 1998 .................... $ 976
======
Deductions during period:
Cost of real estate sold .......... $ -
--------
Other (describe) .................. - $ -
-------- --------
Balance at December 31, 1998 ......................... $ 62,750
========
</TABLE>
F-25
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement of Purchase and Sale, dated as
of May 21, 1998, by and among Registrant
and the various corporations identified
on Exhibit A thereto (which includes as
Exhibit D thereto, the form of the
Master Agreement relating to the leasing
of the properties), including Amerihost
Properties, Inc. and Amerihost Inns,
Inc. (previously filed with the
Commission as Exhibit 2.2 to the
Registrant's Form 8-K dated June 5, 1998
and incorporated herein by reference).
2.2 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).
*3.1 Declaration of Trust
*3.1(a) Amendment No. 1 to Declaration of Trust
**3.1(b) Amendment No. 2 to Declaration of Trust
*3.2 Bylaws
*4. Instruments defining the rights of
security holders. The instruments filed
in response to items 3.1 and 3.2 are
incorporated in this item by reference.
***10.1 Investment Management Agreement between
the Company and PMC Advisers, Inc.
*10.2 1993 Employee Share Option Plan
*10.3 1993 Trust Manager Share Option Plan
*10.5 Loan Origination Agreement
****10.6 Revolving Credit Facility
****10.7 Third Amendment to Loan Agreement and
Amendment to Loan Documents and Renewal
and Extension of Loan Dated as of March
15, 1998.
*****10.8 Fourth Amendment to Loan Agreement and
Amendment to Loan Documents and Renewal
and Extension of Loan Dated as of June
30, 1998.
*****10.9 Fifth Amendment to Loan Agreement and
Amendment to Loan Documents and Renewal
and Extension of Loan Dated as of
November 30, 1998.
10.10 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).
*****21 Subsidiaries of the Registrant
*****27 Financial Data Schedule
</TABLE>
- ----------------
* Previously filed as an exhibit to the Company's Registration Statement
of Form S-11 filed with the Commission on June 25, 1993, as amended
(Registration No. 33-65910), and incorporated herein by reference.
** Previously filed with the commission as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
*** Previously filed with the commission as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
**** Previously filed with the commission as an exhibit to the Company's
quarterly report on Form 10-K for the quarter ended March 31, 1998.
***** Filed herewith.
E-1
<PAGE> 1
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT TO LOAN DOCUMENTS
THIS FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND AMENDMENT TO
LOAN DOCUMENTS (this "AMENDMENT") is made and entered into to be effective as of
the 30th day of June, 1998, by and between PMC COMMERCIAL TRUST (herein referred
to with its successors and assigns as the "BORROWER") and BANK ONE, TEXAS, N.A.,
a national banking association (herein referred to with its successors and
assigns as the "LENDER").
RECITALS:
A. Borrower and Lender executed that certain Revolving Credit
Agreement, dated as of May 12, 1995, as amended by that certain First Amendment
to Revolving Credit Agreement dated as of October 18, 1995, that certain Second
Amendment to Revolving Credit Agreement and Amendment to Loan Documents and
Renewal and Extension of Loan dated as of May 12, 1996, and by that certain
Third Amendment to Revolving Credit Agreement and Amendment to Loan Documents
and Renewal and Extension of Loan dated as of March 15, 1998 (the "LOAN
AGREEMENT"), pursuant to which the Lender has made and may hereafter make loans
to the Borrower, as evidenced by that certain Revolving Credit Note executed by
Borrower and dated as of May 12, 1995, payable to the order of Lender in the
maximum principal amount of $10,000,000.00, as increased, restated and otherwise
amended by that certain promissory note executed by the Borrower and dated as of
March 15, 1998, payable to the order of Lender in the maximum principal amount
of $20,000,000.00 (the "EXISTING REVOLVING CREDIT NOTE"). Except as otherwise
expressly provided herein, all capitalized terms used herein shall have the same
meanings assigned to such terms in the Loan Agreement.
B. The Borrower and Lender have agreed, subject to the terms and
conditions outlined herein and subject to the Borrower's agreement with the
terms and provisions hereof and of each and every other instrument and agreement
executed in connection herewith, to restructure the credit facilities made
available pursuant to the Loan Agreement and Existing Revolving Credit Note.
AGREEMENTS
In consideration of the premises, which are made a part hereof, and the
mutual covenants and agreements contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby amend the Loan Agreement and Loan Documents as follows:
EXHIBIT 10.8
Page 1 of 8
<PAGE> 2
SECTION I
AMENDMENTS TO THE LOAN AGREEMENT
The Loan Agreement is hereby amended in the following respects:
1.1 AMENDMENT TO SECTION 1.1.
(a) SECTION 1.1 of the Loan Agreement shall be and is
hereby amended to delete the definition of "BUSINESS DAY" contained
therein and to substitute the following definition in lieu thereof:
" 'BUSINESS DAY' shall have the meaning ascribed to
such term in that certain Fourth Amended and Restated
Revolving Credit Note dated as of June 30, 1998, executed by
the Borrower, payable to the order of the Bank in the maximum
principal amount of $30,000,000.00.
(b) SECTION 1.1 of the Loan Agreement shall be and is
hereby further amended to delete sub-part (a) from the definition of
"Combined Borrowing Base Availability" and to substitute the following
in lieu thereof:
"...(a) The Combined Borrowing Base Availability shall
never exceed the lesser of (i) $40,000,000.00, or (ii) the sum
of $30,000,000.00 plus the face amount of each Guidance Line
Note executed and delivered by the Borrower and accepted by
the Bank pursuant to SECTION 2.9 of this Agreement which has
not matured (whether by acceleration, the lapse of time or
otherwise)..."
(c) SECTION 1.1 of the Loan Agreement shall be and is
hereby further amended to delete the definition of "Guidance Line of
Credit" and to substitute the following in lieu thereof:
" 'GUIDANCE LINE OF CREDIT' means an uncommitted credit
facility that may, from time to time, in the sole and absolute
discretion of the Bank, be made available to the Borrower
pursuant to SECTION 2.9 of this Agreement in an aggregate
amount at any time outstanding up to, but not to exceed, the
lesser of (i) $10,000,000.00, or (ii) the sum of the maximum
face amounts of all Guidance Line Notes executed and delivered
by the Borrower and accepted by the Bank pursuant to SECTION
2.9 of this Agreement which have not matured (whether by
acceleration, the lapse of time or otherwise)."
EXHIBIT 10.8
Page 2 of 8
<PAGE> 3
(d) SECTION 1.1 of the Loan Agreement shall be and is
hereby further amended to add the following as additional definitions
thereto:
" 'PURCHASED PROPERTY OR PROPERTIES' shall mean the
commercial real estate properties purchased by Borrower in
connection with the acquisition of Amerihost and more
particularly described on EXHIBIT "K" attached hereto,
unencumbered by liens except as described on EXHIBIT "I"
attached hereto."
" 'PURCHASE ADVANCE' shall mean the amount advanced
under the Borrowing Base in connection with a Purchased
Property."
(e) SECTION 1.1 of the Loan Agreement shall be and is hereby
further amended to delete the definition of "REVOLVING CREDIT NOTE"
contained therein and to substitute the following definition in lieu
thereof:
" 'REVOLVING CREDIT NOTE' means and refers to that
certain Fourth Amended and Restated Revolving Credit Note
dated as of June 30, 1998, executed by the Borrower, payable
to the order of Bank in the maximum principal amount of
$30,000,000.00, as the same may, from time to time, be
renewed, increased, extended, restated, amended or otherwise
modified."
(f) SECTION 1.1 of the Loan Agreement shall be and is
hereby further amended to delete the definition of "MAXIMUM BORROWING
BASE AVAILABILITY" contained therein and to substitute the following
definition in lieu thereof:
" 'MAXIMUM BORROWING BASE AVAILABILITY' shall mean
the lesser of (a) the sum of $30,000,000.00 plus the face
amounts of all Guidance Line Notes executed and delivered by
the Borrower and accepted by the Bank pursuant to SECTION 2.9
of this Agreement which have not matured (whether by
acceleration, the lapse of time or otherwise), or (b) the
Combined Borrowing Base Availability."
1.2 AMENDMENT TO SECTION 2.1. SECTION 2.1(a)(i) of the Loan
Agreement shall be and is hereby amended to delete the same in its entirety and
to substitute the following in lieu thereof:
"....(i) the sum of $30,000,000.00 plus the aggregate
face amounts of all Guidance Line Notes executed and delivered
by the Borrower and accepted by the Bank pursuant to SECTION
2.9 of this Agreement which have not matured (whether by
acceleration, the lapse of time or otherwise); or..."
EXHIBIT 10.8
Page 3 of 8
<PAGE> 4
1.3. AMENDMENT TO ARTICLE 5. ARTICLE 5 of the Loan Agreement is
hereby amended by the addition of the following to the end thereof:
" 'SECTION 5.17. PURCHASED PROPERTIES. With respect
to each of the Purchased Properties listed on EXHIBIT "K", (a)
Borrower owns such property in fee simple, unencumbered by any
liens other than liens for taxes not yet due and payable and
the encumbrances listed on EXHIBIT "I"; (b) the address listed
on EXHIBIT "K" is the true and correct address of such
Purchased Property; (c) the appraised value listed on EXHIBIT
"K" is supported by a current Appraisal; and (d) neither the
condition nor the use of such Purchased Property is in
violation of any Environmental Laws.
1.4 AMENDMENT TO SECTION 6.8. SECTION 6.8 of the Loan Agreement is
hereby amended by adding the following after the first sentence thereof:
"Notwithstanding the foregoing, from June 30, 1998, through November 30, 1998,
the proceeds of the Advances made under this Agreement may be used by Borrower
for the additional purpose of funding the purchase of the Purchased Properties."
1.5 AMENDMENT TO ARTICLE 7.
(a) SECTION 7.1 of the Loan Agreement shall be and is
hereby amended by deleting the second and third sentences thereof.
(b) SECTION 7.8 is hereby waived during the Interim Period
only.
(c) SECTION 7.11 is hereby amended to add the following
subsection to the end of SECTION 7.11:
"...and (f) indebtedness, the proceeds of which are
used entirely to repay amounts owing by Borrower to Lender."
(d) SECTION 7.16 is hereby amended to add the following
subsection to the end of SECTION 7.16:
"(g) Sell, mortgage, transfer or otherwise convey any
interest in a Purchased Property, unless the Purchase Advance
associated with such Purchased Property is repaid in full."
EXHIBIT 10.8
Page 4 of 8
<PAGE> 5
1.6 NOTICES, CERTIFICATES AND EXHIBITS. The forms of Notice of
Borrowing, Compliance Certificate and Borrowing Base Report shall be amended so
that, in each insistence where the amount of $20,000,000.00 appears, the sum of
(a) $30,000,000.00 plus (b) the sum of the maximum face amounts of all Guidance
Line Notes which have been executed and delivered by the Borrower and accepted
by the Bank in accordance with SECTION 2.9 of the Loan Agreement and which have
not matured (whether by acceleration, the lapse of time or otherwise) is
substituted for $20,000,000.00. The schedule of exhibits to the Loan Agreement
shall be amended to delete EXHIBIT "I" thereto, and to substitute the form of
EXHIBIT "I" which is attached to this Amendment as EXHIBIT "A" and made a part
hereof for all purposes, and to add as EXHIBIT "K" thereto the form of EXHIBIT
"K" attached to this Amendment as EXHIBIT "B" and made a part hereof for all
purposes, and said forms of EXHIBIT "I" and "K" shall be, and hereby do become,
a part of the Loan Agreement.
1.7 TEMPORARY AMENDMENT TO THE LOAN AGREEMENT. Lender and Borrower
have agreed that, for the time period beginning June 30, 1998, and continuing
through November 30, 1998, (the "INTERIM PERIOD"), Borrower may receive advances
under the Borrowing Base against the value of the Purchased Properties.
Accordingly, during the Interim Period only, "COMBINED BORROWING BASE
AVAILABILITY" shall mean that portion of the Loan allocated by Bank to Eligible
Mortgage Loans and Purchased Property, provided that the Borrowing Base
Availability allocated to an Eligible Mortgage Loan shall never exceed the
lesser of (a) the Collateral Value Applicable to such Eligible Mortgage Loan, or
(b) $750,000.00, if the Project which secures such Mortgage Loan is not a hotel
or motel and $2,000,000.00 with respect to all Mortgage Loans, and provided
further that the Borrowing Base Availability allocated to a Purchased Property
shall never exceed the lesser of (a) $20,000,000.00 or (b) forty percent (40%)
of the lesser of (i) Borrower's purchase price for such Purchased Property as
listed on EXHIBIT "K" to the Loan Agreement, or (ii) the Appraised Value of such
Purchased Property . The term "AFFECTED PROJECT" as used in SECTION 2.6(f) of
the Loan Agreement shall include any Purchased Property damaged or destroyed as
a result of fire or other casualty and the terms of SECTION 2.6(f) of the Loan
Agreement shall apply to any such damaged or destroyed Purchased Property. After
November 1, 1998, the definition of COMBINED BORROWING BASE AVAILABILITY shall
revert back to the previous definition set out in the Loan Agreement. On or
before November 30, 1998, Borrower shall repay in full all Purchase Advances,
and upon such payment the properties listed on EXHIBIT "K" shall cease to be
Purchased Properties. If Borrower fails to repay all Purchase Advances on or
before November 30, 1998, Borrower shall, by January 15, 1999, grant and deliver
to Lender, at Borrower's expense, a perfected first lien mortgage or deed of
trust against each Purchased Property securing the Loan in form acceptable to
Lender, along with original mortgagee's policies of title insurance issued with
respect to each such mortgage or deed of trust, and any Project Documents
requested by Lender pertaining to the Purchased Properties, and any other
documents reasonably requested by Lender to ensure that the Loan is secured by
liens against the Purchased Properties. Failure to deliver all such requested
instruments and documents or on before January 15, 1999, shall constitute an
Event of Default under the Loan Agreement.
EXHIBIT 10.8
Page 5 of 8
<PAGE> 6
SECTION II
AMENDMENT TO THE REVOLVING CREDIT NOTE
2.1 FOURTH AMENDED AND RESTATED REVOLVING CREDIT NOTE.
Contemporaneously with the execution hereof, Borrower shall execute and deliver
to Bank a Fourth Amended and Restated Revolving Credit Note (herein so called)
dated as of June 30, 1998, in the maximum principal amount of $30,000,000.00
which shall, from and after June 30, 1998, constitute the "REVOLVING CREDIT
NOTE" contemplated by the Loan Agreement and Loan Documents.
SECTION III
AMENDMENT TO LOAN DOCUMENTS
3.1 REFERENCE TO THE LOAN AGREEMENT. Each of the Loan Documents is
hereby amended so that any reference in any Loan Document to the Loan Agreement
or to any other Loan Document shall mean a reference to the Loan Agreement or
such other Loan Document as amended hereby, and any reference in the Loan
Agreement or any other Loan Document to the Revolving Credit Note shall mean a
reference to the Fourth Amended and Restated Revolving Credit Note executed
contemporaneously herewith.
SECTION IV
MISCELLANEOUS
4.1 AUTHORITY. The Borrower hereby represents and warrants that
the execution, delivery and performance of this Amendment, all instruments,
agreements and other documents executed in connection herewith and all other
instruments, agreements and documents executed in connection with the Loan
Agreement have been duly authorized by all necessary action of the Borrower and
do not and will not: (a) violate any provisions of any agreement, law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
presently in effect to which Borrower is a party or to which it or any of its
assets may be subject; (b) result in, or require the creation or imposition of
any Lien (other than a Permitted Lien) upon or with respect to any asset now
owned by Borrower or any Collateral; or (c) result in a breach of or constitute
a default by Borrower (and Borrower is not in default) under any indenture, loan
or credit agreement or any other agreement or instrument to which it is a party
or by which it or any of its assets is bound or affected. Borrower further
warrants and represents that no approval, authorization, order, license, permit,
franchise or consent of or registration, declaration, qualification or filing
with any governmental authority is required in connection with the execution,
delivery or performance by Borrower of this Amendment or any other Loan
Document. Such instruments and agreements constitute the legal, valid and
binding obligations of the Borrower, enforceable against Borrower in accordance
with their respective terms, subject only to the applicable debtor relief laws.
EXHIBIT 10.8
Page 6 of 8
<PAGE> 7
4.2 RATIFICATION. Borrower hereby ratifies and confirms the Loan
Agreement and Loan Documents, as renewed, extended, modified and otherwise
amended hereby, in all respects, and acknowledges and agrees that all of the
terms, provisions and covenants thereof, as renewed, extended, modified and
otherwise amended hereby and by the Third Amended and Restated Revolving Credit
Note, do and shall remain and continue in full force and effect, enforceable
against the Borrower and its assets in accordance with their terms.
4.3 FURTHER ASSURANCES. The Borrower covenants and agrees from
time to time to promptly execute, assign, endorse, and deliver to Lender all
documents, instruments, notices, agreements, assignments, pledges, statements,
and writings, and to do all other acts and things as the Lender may reasonable
request in order to more fully evidence and/or to carry out more fully the
intent and purposes of this Amendment, the Loan Agreement and other Loan
Documents.
4.4 MULTIPLE COUNTERPARTS. Multiple counterparts of this Amendment
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
4.5 REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants that all representations and warranties contained in the Loan
Agreement and other Loan Documents are and continue to be true and correct in
all material respects, as if made on the date hereof, and nothing is omitted
therefrom that would cause the same to be misleading in any material respect.
4.6 APPLICABLE LAWS. THIS AMENDMENT SHALL BE CONSTRUED,
INTERPRETED AND ENFORCEABLE UNDER AND PURSUANT TO THE LAWS OF THE STATE OF TEXAS
AND APPLICABLE LAWS OF THE UNITED STATES.
4.7 NO ORAL AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS
THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
EXHIBIT 10.8
Page 7 of 8
<PAGE> 8
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Amendment to be executed effective as of the date specified above.
BORROWER:
PMC COMMERCIAL TRUST
By:
--------------------------------
Printed Name:
----------------------
Title:
-----------------------------
LENDER:
BANK ONE TEXAS, N.A.
By:
--------------------------------
Printed Name:
----------------------
Title:
-----------------------------
EXHIBIT 10.8
Page 8 of 8
<PAGE> 1
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND AMENDMENT
TO LOAN DOCUMENTS
THIS FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND AMENDMENT TO
LOAN DOCUMENTS (this "AMENDMENT") is made and entered into to be effective as of
the 30th day of November, 1998, by and between PMC COMMERCIAL TRUST (herein
referred to with its successors and assigns as the "BORROWER") and BANK ONE,
TEXAS, N.A., a national banking association (herein referred to with its
successors and assigns as the "LENDER").
RECITALS:
A. Borrower and Lender executed that certain Revolving Credit
Agreement, dated as of May 12, 1995, as amended by that certain First Amendment
to Revolving Credit Agreement dated as of October 18, 1995, that certain Second
Amendment to Revolving Credit Agreement and Amendment to Loan Documents and
Renewal and Extension of Loan dated as of May 12, 1996, and by that certain
Third Amendment to Revolving Credit Agreement and Amendment to Loan Documents
and Renewal and Extension of Loan dated as of March 15, 1998, and that certain
Fourth Amendment to Revolving Credit Agreement and Amendment to Loan Documents
(the "FOURTH AMENDMENT") dated as of June 30, 1998 (the "LOAN AGREEMENT"),
pursuant to which the Lender has made and may hereafter make loans to the
Borrower. Except as otherwise expressly provided herein, all capitalized terms
used herein shall have the same meanings assigned to such terms in the Loan
Agreement.
B. The Borrower and Lender have agreed, subject to the terms and
conditions outlined herein and subject to the Borrower's agreement with the
terms and provisions hereof and of each and every other instrument and agreement
executed in connection herewith, to restructure the credit facilities made
available pursuant to the Loan Agreement.
AGREEMENTS
In consideration of the premises, which are made a part hereof, and the
mutual covenants and agreements contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby amend the Loan Agreement and Loan Documents as follows:
EXHIBIT 10.9
Page 1 of 5
<PAGE> 2
SECTION I
Amendments to the Loan Agreement
The Loan Agreement is hereby amended in the following respects:
1.1 AMENDMENT TO SECTION 6.8. SECTION 6.8 of the Loan Agreement is
hereby amended by adding the following after the first sentence thereof:
"Notwithstanding the foregoing, from June 30, 1998, through March 15, 1999, the
proceeds of the Advances made under this Agreement may be used by Borrower for
the additional purpose of funding the purchase of the Purchased Properties."
1.2 EXTENSION OF TEMPORARY AMENDMENT TO THE LOAN AGREEMENT. Lender
and Borrower have agreed that the Interim Period, as defined in SECTION 1.7 of
the Fourth Amendment shall be extended through March 15, 1999. During such
Interim Period only, "COMBINED BORROWING BASE AVAILABILITY" shall mean that
portion of the Loan allocated by Bank to Eligible Mortgage Loans and Purchased
Property, provided that the Borrowing Base Availability allocated to an Eligible
Mortgage Loan shall never exceed the lesser of (a) the Collateral Value
Applicable to such Eligible Mortgage Loan, or (b) $750,000.00, if the Project
which secures such Mortgage Loan is not a hotel or motel and $2,000,000.00 with
respect to all Mortgage Loans, and provided further that the Borrowing Base
Availability allocated to the Purchased Properties shall never exceed the lesser
of (a) $20,000,000.00 or (b) forty percent (40%) of the lesser of (i) Borrower's
purchase price for such Purchased Properties as listed on EXHIBIT "K" to the
Loan Agreement, or (ii) the aggregate Appraised Value of such Purchased
Properties. The term "AFFECTED PROJECT" as used in SECTION 2.6(f) of the Loan
Agreement shall include any Purchased Property damaged or destroyed as a result
of fire or other casualty and the terms of SECTION 2.6(f) of the Loan Agreement
shall apply to any such damaged or destroyed Purchased Property. After the end
of the Interim Period, the definition of COMBINED BORROWING BASE AVAILABILITY
shall revert back to the previous definition set out in the Loan Agreement. On
or before March 15, 1999, Borrower shall repay in full all Purchase Advances,
and upon such payment the properties listed on EXHIBIT "K" shall cease to be
Purchased Properties. If Borrower fails to repay all Purchase Advances on or
before March 15, 1999, Borrower shall, by May 1, 1999, grant and deliver to
Lender, at Borrower's expense, a perfected first lien mortgage or deed of trust
against each Purchased Property securing the Loan in form acceptable to Lender,
along with original mortgagee's policies of title insurance issued with respect
to each such mortgage or deed of trust, and any Project Documents requested by
Lender pertaining to the Purchased Properties, and any other documents
reasonably requested by Lender to ensure that the Loan is secured by liens
against the Purchased Properties. Failure to deliver all such requested
instruments and documents or on before May 1, 1999, shall constitute an Event of
Default under the Loan Agreement.
EXHIBIT 10.9
Page 2 of 5
<PAGE> 3
SECTION II
Guidance Line Note
2.1 GUIDANCE LINE NOTE. Contemporaneously with the execution hereof,
Borrower shall execute and deliver to Bank a Guidance Line Note (herein so
called) dated as of November 30, 1998, in the maximum principal amount of
$5,000,000.00 which shall, from and after November 30, 1998, constitute the
"GUIDANCE LINE NOTE NO. 1" contemplated by the Loan Agreement and Loan
Documents.
SECTION III
Amendment to Loan Documents
3.1 REFERENCE TO THE LOAN AGREEMENT. Each of the Loan Documents is
hereby amended so that any reference in any Loan Document to the Loan Agreement
or to any other Loan Document shall mean a reference to the Loan Agreement or
such other Loan Document as amended hereby, and any reference in the Loan
Agreement or any other Loan Document to the Revolving Credit Note shall mean a
reference to the Fourth Amended and Restated Revolving Credit Note and the
Guidance Line Note No. 1 executed contemporaneously herewith.
SECTION IV
Miscellaneous
4.1 AUTHORITY. The Borrower hereby represents and warrants that the
execution, delivery and performance of this Amendment, all instruments,
agreements and other documents executed in connection herewith and all other
instruments, agreements and documents executed in connection with the Loan
Agreement have been duly authorized by all necessary action of the Borrower and
do not and will not: (a) violate any provisions of any agreement, law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
presently in effect to which Borrower is a party or to which it or any of its
assets may be subject; (b) result in, or require the creation or imposition of
any Lien (other than a Permitted Lien) upon or with respect to any asset now
owned by Borrower or any Collateral; or (c) result in a breach of or constitute
a default by Borrower (and Borrower is not in default) under any indenture, loan
or credit agreement or any other agreement or instrument to which it is a party
or by which it or any of its assets is bound or affected. Borrower further
warrants and represents that no approval, authorization, order, license, permit,
franchise or consent of or registration, declaration, qualification or filing
with any governmental authority is required in connection with the execution,
delivery or performance by Borrower of this Amendment or any other Loan
Document. Such instruments and agreements constitute the legal, valid and
binding obligations of the Borrower, enforceable against Borrower in accordance
with their respective terms, subject only to the applicable debtor relief laws.
EXHIBIT 10.9
Page 3 of 5
<PAGE> 4
4.2 RATIFICATION. Borrower hereby ratifies and confirms the Loan
Agreement and Loan Documents, as renewed, extended, modified and otherwise
amended hereby, in all respects, and acknowledges and agrees that all of the
terms, provisions and covenants thereof, as renewed, extended, modified and
otherwise amended hereby, do and shall remain and continue in full force and
effect, enforceable against the Borrower and its assets in accordance with their
terms.
4.3 FURTHER ASSURANCES. The Borrower covenants and agrees from time
to time to promptly execute, assign, endorse, and deliver to Lender all
documents, instruments, notices, agreements, assignments, pledges, statements,
and writings, and to do all other acts and things as the Lender may reasonable
request in order to more fully evidence and/or to carry out more fully the
intent and purposes of this Amendment, the Loan Agreement and other Loan
Documents.
4.4 MULTIPLE COUNTERPARTS. Multiple counterparts of this Amendment
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
4.5 REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants that all representations and warranties contained in the Loan
Agreement and other Loan Documents are and continue to be true and correct in
all material respects, as if made on the date hereof, and nothing is omitted
therefrom that would cause the same to be misleading in any material respect.
4.6 APPLICABLE LAWS. THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED
AND ENFORCEABLE UNDER AND PURSUANT TO THE LAWS OF THE STATE OF TEXAS AND
APPLICABLE LAWS OF THE UNITED STATES.
4.7 NO ORAL AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
EXHIBIT 10.9
Page 4 of 5
<PAGE> 5
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Amendment to be executed effective as of the date specified above.
BORROWER:
PMC COMMERCIAL TRUST
By:
-------------------------------
Printed Name:
---------------------
Title:
----------------------------
LENDER:
BANK ONE TEXAS, N.A.
By:
-------------------------------
Alan Miller, Vice President
EXHIBIT 10.9
Page 5 of 5
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE
OF
COMPANY INCORPORATION
------- -------------
<S> <C>
PMC Commercial Limited Partnership Delaware
PMC Commercial Corp. Delaware
PMC Commercial Trust, Ltd. 1998-1 Delaware
PMCT Corp. 1998-1 Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FORM 10-K OF THE PMC OCMMERCIAL TRUST AND IS QUALIFIED IN ITS ENTIRETY
BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 23
<SECURITIES> 202
<RECEIVABLES> 120,598<F1>
<ALLOWANCES> (100)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,750
<DEPRECIATION> (976)
<TOTAL-ASSETS> 196,690<F2>
<CURRENT-LIABILITIES> 7,866<F3>
<BONDS> 95,387
0
0
<COMMON> 94,167
<OTHER-SE> (730)
<TOTAL-LIABILITY-AND-EQUITY> 196,690
<SALES> 0
<TOTAL-REVENUES> 19,508
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,608
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 4,289
<INCOME-PRETAX> 11,371
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,371
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
<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 266
(ii) DEFERRED BORROWING COSTS 637
(iii) RESTRICTED INVESTMENTS 13,290
------
14,193
======
<F3>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE:
(i) DIVIDENDS PAYABLE 2,967
(ii) OTHER LIABILITIES 1,827
(iii) INTEREST PAYABLE 494
(iv) BORROWER ADVANCES 788
(v) UNEARNED COMMITMENT FEES 558
(vi) DUE TO AFFILIATES 1,232
-----
7,866
=====
</FN>
</TABLE>
