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FORM 10 K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
Commission File Number: 1-13610
PMC COMMERCIAL TRUST
Texas | 75-6446078 | |
(State or other jurisdiction | (I.R.S. Employer Identification No.) | |
of incorporation or organization) | ||
18111 Preston Road, Suite 600, Dallas, TX 75252 | (972) 349-3200 | |
(Address of principal executive offices) | (Registrants telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
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 Registrants 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 29, 2000 as reported on the American Stock Exchange, was approximately $67 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 29, 2000, Registrant had outstanding 6,536,896 Common Shares of Beneficial Interest.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrants 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 17, 2000 are incorporated by reference into Part III.
PMC COMMERCIAL TRUST AND SUBSIDIARIES
PMC Commercial Trust
Item | Page | |||||
PART I | ||||||
1. | Business | 3 | ||||
2. | Properties | 18 | ||||
3. | Legal Proceedings | 18 | ||||
4. | Submission of Matters to a Vote of Security Holders | 18 | ||||
PART II | ||||||
5. | Market for the Registrants Common Equity and Related Shareholder Matters | 19 | ||||
6. | Selected Consolidated Financial Data | 20 | ||||
7. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||||
7A. | Quantitative and Qualitative Disclosures about Market Risk | 32 | ||||
8. | Consolidated Financial Statements and Supplementary Data | 32 | ||||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 32 | ||||
PART III | ||||||
10. | Directors and Executive Officers of the Registrant | 33 | ||||
11. | Executive Compensation | 33 | ||||
12. | Security Ownership of Certain Beneficial Owners and Management | 33 | ||||
13. | Certain Relationships and Related Transactions | 33 | ||||
PART IV | ||||||
14. | Exhibits, Financial Statements, Schedules and Reports on Form 8-K | 34 | ||||
Signatures | 35 | |||||
Consolidated Financial Statements | F-1 | |||||
Exhibits | E-1 |
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PART I
Item 1. BUSINESS
General
PMC Commercial Trust PMC Commercial or together with its wholly-owned subsidiary (the Company, our or we) is a real estate investment trust (REIT) that originates loans to small business enterprises and owns limited service hospitality properties. Prior to June 1998, we were solely a commercial lender that originated loans to small business enterprises, primarily collateralized by first liens on real estate of the related business. Our loans are primarily to borrowers in the lodging industry but we also target loans for commercial real estate and the service, retail and manufacturing industries.
We were formed, pursuant to the Texas Real Estate Investment Trust Act, on June 4, 1993 and commenced operations on December 28, 1993. As a REIT, we must distribute at least 95% of our REIT taxable income to shareholders. See Tax Status. Our investments 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. We generate income from interest earned on our loan portfolio, other related fee income from our lending activities and rental income from property ownership.
The Companys 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) and an additional four Amerihost properties in March 1999 (together, with the Acquired Amerihost Properties, the Hotel Properties) for an aggregate of $73 million in a sale/leaseback transaction (the Amerihost Transaction). The Company intends to enhance shareholder value by increasing its loan portfolio and, to a more limited extent, making strategic acquisitions of commercial properties.
We intend to accomplish our goal of maximizing shareholder value by maintaining long-term growth in cash available for distribution to our shareholders. We currently have three principal strategies to achieve this objective. First, we expect to continue to benefit from the established customer base of PMC Capital due to the referral system available through PMC Advisers. We are seeking to expand our relationships with national hotel and motel franchisers to secure a consistent flow of lending opportunities. Second, we will continue to seek cost-effective financing to maximize our growth through structured financing arrangements and other funding sources. See Operations - Secured Financing Transactions. Third, we intend to continue selectively investing in commercial real estate on a limited basis, dependent upon the availability of non-recourse financing.
Loan Originations
We have primarily been a lender to small business owners in the lodging industry. The majority of our loans in the lodging industry are to owner-managed facilities generally operating as franchises of national hotel or motel brands. As of December 31, 1999, 97% of the Companys outstanding loan portfolio consisted of loans used for the acquisition, renovation or construction of hospitality properties. The franchise distribution of the portfolio consisted primarily of Days Inn, Comfort Inn and Holiday Inn franchisees which were 17%, 14% and 13%, respectively, of our outstanding loan portfolio as of December 31, 1999.
We operate from the headquarters of the Investment Manager in Dallas, Texas, and through its loan production offices in Georgia and Arizona. The Investment Manager receives loan referrals from PMC Capital who solicits loan applications on our behalf 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. We are not responsible for any compensation to PMC Capital for loan referrals. In addition, the Investment Manager has generated a significant percentage of loans through referrals from lawyers, accountants, real estate and loan brokers and existing borrowers. In some instances, we may make
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Lending Activities
From December 28, 1993 (commencement of operations) through December 31, 1999, we funded an aggregate principal amount of approximately $213.6 million consisting of 194 loans.
The weighted average interest rate for our loans outstanding as of December 31, 1999 was 10.1%. The following table sets forth the interest rates we charged on loans originated for the five years ended December 31, 1999:
Interest Rates and Principal Amounts of Loans Originated | ||||||||||||||||||||||||||||
Weighted | Interest Rate Range | |||||||||||||||||||||||||||
Average Interest | ||||||||||||||||||||||||||||
Year Ended | Rate | Total | 8.00-8.99% | 9.00-9.99% | 10.00-10.99% | 11.00-11.99% | 12.0-12.99% | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
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 | - | |||||||||||||||||||||
1999 | 9.70% | 17,478 | 2,548 | 13,637 | 992 | 301 | - | |||||||||||||||||||||
Total | $ | 175,716 | $ | 12,802 | $ | 38,495 | $ | 83,053 | $ | 41,145 | $ | 221 | ||||||||||||||||
Percentage of Portfolio Originations | 100.0 | % | 7.3 | % | 21.9 | % | 47.3 | % | 23.4 | % | 0.1 | % | ||||||||||||||||
During the years ended December 31, 1999 and 1998, we closed loans to 10 and 27 borrowers, respectively. Aggregate fundings for the years ended December 31, 1999 and 1998 were approximately $17.5 million and $43.0 million, respectively, and commitment fees collected were approximately $0.2 million and $1.0 million, respectively. As of December 31, 1999 and 1998, approximately 23% and 25%, respectively, of our loan portfolio consisted of loans to borrowers in Texas and approximately 10% and 9%, respectively, of our loan portfolio consisted of loans to borrowers in Florida. No other state had a concentration of 10% or greater of the loan portfolio at December 31, 1999 or 1998. Our loan portfolio was approximately 97% concentrated in the lodging industry at December 31, 1999 and 1998. As of December 31, 1999 all loans were paying as agreed (See Delinquency and Collections). Since inception, the Company has not experienced any charge-offs.
When originating a loan, we charge 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. We had approximately $1.5 million and $2.3 million in net unamortized deferred commitment fees at December 31, 1999 and 1998, respectively.
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The following table sets forth a breakdown of our loan portfolio at December 31, 1999 to borrowers involved in the lodging (national franchises and independent hospitality properties) and commercial real estate industries:
Number of | Principal | Percentage of | ||||||||||
Properties | Outstanding | Portfolio | ||||||||||
(In thousands) | ||||||||||||
Days Inn | 14 | $ | 19,637 | 16.8 | % | |||||||
Comfort Inn | 12 | 16,687 | 14.3 | % | ||||||||
Holiday Inn | 14 | 15,609 | 13.4 | % | ||||||||
Quality Inn | 6 | 10,114 | 8.7 | % | ||||||||
Best Western | 7 | 7,922 | 6.8 | % | ||||||||
Econolodge | 6 | 6,187 | 5.3 | % | ||||||||
Ramada Inn | 4 | 5,533 | 4.7 | % | ||||||||
Hampton Inn | 4 | 3,844 | 3.3 | % | ||||||||
Sleep Inn | 3 | 3,635 | 3.1 | % | ||||||||
Home & Hearth | 2 | 2,897 | 2.5 | % | ||||||||
Super 8 | 3 | 2,605 | 2.2 | % | ||||||||
Howard Johnson | 3 | 2,396 | 2.0 | % | ||||||||
Sheraton | 1 | 2,386 | 2.0 | % | ||||||||
Wingate Inn | 1 | 2,371 | 2.0 | % | ||||||||
Comfort Suites | 1 | 1,784 | 1.5 | % | ||||||||
Baymont | 1 | 1,533 | 1.3 | % | ||||||||
Shoneys Inn | 1 | 1,382 | 1.2 | % | ||||||||
Travelodge | 1 | 1,268 | 1.1 | % | ||||||||
Microtel Inn | 2 | 1,229 | 1.1 | % | ||||||||
Clarion | 1 | 1,087 | 0.9 | % | ||||||||
Total of Franchise Affiliates | 87 | 110,106 | 94.2 | % | ||||||||
Independent Hospitality Properties | 5 | 3,546 | 3.0 | % | ||||||||
Non-Hospitality Properties | 4 | 3,243 | 2.8 | % | ||||||||
Total | 96 | $ | 116,895 | 100.0 | % | |||||||
The following table is a breakdown of loans originated on a quarterly basis for the five years in the period ended December 31, 1999:
1999 | 1998 | 1997 | 1996 | 1995 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
First Quarter | $ | 7,061 | $ | 9,437 | $ | 13,955 | $ | 4,830 | $ | 9,328 | ||||||||||
Second Quarter | 3,576 | 16,271 | 12,795 | 8,801 | 11,110 | |||||||||||||||
Third Quarter | 3,808 | 8,417 | 9,128 | 12,955 | 4,441 | |||||||||||||||
Fourth Quarter | 3,033 | 8,843 | 7,251 | 13,844 | 6,832 | |||||||||||||||
$ | 17,478 | $ | 42,968 | $ | 43,129 | $ | 40,430 | $ | 31,711 | |||||||||||
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The following table sets forth the amount of our loans originated and repaid for the years indicated:
Years Ended December 31, | ||||||||||||||||||||
1999 | 1998 | 1997 | 1996 | 1995 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans receivable, net-beginning of period | $ | 119,712 | $ | 109,132 | $ | 91,981 | $ | 59,129 | $ | 32,694 | ||||||||||
Loans originated or purchased | 17,478 | 42,968 | 43,129 | 40,430 | 31,711 | |||||||||||||||
Loan repayments(1) | (22,192 | ) | (32,126 | ) | (25,843 | ) | (7,181 | ) | (4,992 | ) | ||||||||||
Other adjustments(2) | 267 | (262 | ) | (135 | ) | (397 | ) | (284 | ) | |||||||||||
Loans receivable, net - end of period | $ | 115,265 | $ | 119,712 | $ | 109,132 | $ | 91,981 | $ | 59,129 | ||||||||||
(1) | Includes the payoff on SBA 504 program loans (see SBA Section 504 Program) and loans which were prepaid prior to maturity. |
(2) | Includes effect of amortization of loans purchased at a discount and commitment fees collected. |
Operations
Our investments outstanding increased by approximately $1 million, from $195 million at December 31, 1998 to $196 million at December 31, 1999. The increase was financed primarily through mortgages on our Hotel Properties. During the years ended December 31, 1998 and prior, we increased our loan portfolio under management through the continued utilization of proceeds from secured financing transactions and proceeds from borrowings under our revolving credit facility. See Managements Discussion and Analysis of Financial Condition and Results of Operations Interest Rate and Prepayment Risk.
Secured Financing Transactions
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 $66.1 million of its Fixed Rate Loan Backed Notes, Series 1998-1 (the 1998 Notes). We own, directly or indirectly, all of the partnership 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 we contributed to the 1998 Partnership. At December 31, 1999, approximately $50.0 million of those loans remained outstanding. We service the loans sold to the 1998 Partnership through PMC Advisers. In connection with this transaction, the 1998 Notes were given a rating of Aaa by Moodys 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. We, therefore, have no obligation to pay the 1998 Notes nor do the holders of the 1998 Notes have any recourse against our assets. 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
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holders of the 1998 Notes) were distributed to us in accordance with our interests in the 1998 Partnership. We utilized these proceeds to help fund the acquisition of the Acquired Amerihost Properties. The 1998 Partnerships assets consist solely of the loans acquired from us, 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, 1999 was $47.8 million.
Amerihost Transaction
On June 30, 1998, we completed the acquisition of the Acquired Amerihost Properties with a total of 1,575 rooms for an aggregate purchase price of $62.2 million. During March 1999, we acquired the remaining four Hotel Properties with a total of 259 rooms for an aggregate purchase price of $10.8 million. The aggregate amount of the lease payments to be received by us for the Hotel Properties is $7.3 million per year (Base Rent) subject to consumer price index (CPI) increases up to a maximum of two percent per year beginning after the third year, plus 2% of gross revenues as defined in the master lease agreement set aside for capital expenditure replacements.
Our subsidiaries assumed debt related to each of the four Hotel Properties acquired in March 1999 that aggregated $6.9 million at the time of acquisition. The notes payable have a weighted average interest rate of 8.0%, each loan has a 20-year amortization period and the maturities range from 15 to 20 years. The notes payable assumed have restrictive provisions which provide substantial penalties if paid prior to maturity and two of the four notes payable assumed by our subsidiaries are guaranteed by PMC Commercial.
Policies with Respect to Certain Activities
The following is a discussion of our 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 our shareholders.
Our principal business objective is to maximize shareholder value by maintaining long-term growth in cash available for distribution to our shareholders. We intend to pursue this objective by continuing to originate loans or, to a more limited extent, through the acquisition of hospitality or commercial properties for long-term ownership. Thereby, we seek to maximize current and long-term availability of funds derived from operations and the value of our assets. Our policy is to originate loans or acquire assets where we believe opportunities exist for acceptable investment returns. No assurance can be given that our investment objectives will be attained or that the value of our assets will not decrease.
At the time of our initial public offering in 1993, we had established a policy that 75% of our assets were to be used generally to fund loans to small businesses. However, in May 1998, we amended our investment policies to remove this restriction and to permit us to invest in real estate assets. At that time, hospitality properties, particularly with respect to smaller, limited service motels operated under national franchises offered attractive returns. We continue to evaluate real estate assets to determine if favorable opportunities exist for the acquisition of real estate assets at attractive returns at prices at or below replacement cost. At the present time, based on current price levels, we believe that opportunities to purchase hospitality properties are not as profitable as they had been as a result of the inability to obtain reasonable non-recourse financing. We may continue to acquire additional lodging or commercial properties or portfolios of such properties, to the extent appropriate financing is available, thereby deriving revenues from fixed leases and participating in increased revenue from those properties.
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To date, we have concentrated our real estate investment activities on lodging properties, or portfolios of properties, which meet one or more of the following criteria:
(i) Properties located in areas with a variety of revenue generators, such as colleges, recreational areas or interstate highways; | |
(ii) Properties with intrinsic values equal to or less than replacement values; | |
(iii) Properties in which the property managers have demonstrated the ability to pay fixed lease obligations; or | |
(iv) Portfolios of properties which exhibit some or all of the criteria discussed above, where purchasing several properties in one transaction enables us to obtain a favorable price or to purchase attractive assets that otherwise would not be available. |
Because we are independent of the lessees and operators of our lodging properties, we have flexibility with respect to acquiring and leasing additional hospitality real estate.
Investment Policies
Investments in Real Estate Mortgages
Investment in Real Estate or Interests in Real Estate
Although we are not currently doing so, we 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 our equity interests.
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Periodic Review of Assets
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Financing Policies
We may from time to time re-evaluate our debt policy in light of factors which include, but are not limited to:
| current economic conditions, | |
| relative costs of debt and equity capital, | |
| change in our market capitalization, and | |
| acquisition opportunities. |
Our future indebtedness, which may be unsecured or may be secured by either mortgage loans or other interest in properties, may take several forms, including:
| bank borrowings, | |
| purchase money obligations to the sellers of properties, | |
| assumed indebtedness, | |
| publicly or privately placed debt instruments, | |
| financing from institutional investors or other lenders, or | |
| mortgage debt. |
Real Estate
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.
Equity
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Other Policies
At present, we do not have a stock repurchase program. As market conditions may warrant, we may institute a stock repurchase program. Based on our current financial position including the restrictions imposed on us by our short-term credit facility, we do not anticipate that we will be instituting a stock buy back program in an amount that would exceed $5 million during the year ending December 31, 2000.
From time to time we may issue or exchange securities for property ownership, as warranted.
Underwriting Criteria - Lending Operations
We primarily originate 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 exceeds PMC Capitals non-committed funds and which otherwise meet our 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 our underwriting criteria.
The underwriting criteria applied by us 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. We evaluate a number of factors to determine the credit worthiness of the prospective borrower and the amount of required debt coverage for the borrower, including:
| the components and value of the borrowers collateral (for example, real estate, equipment or marketable securities); | |
| the ease with which the collateral can be liquidated; | |
| the industry and competitive environment in which the borrower operates; | |
| the financial strength of the guarantors; | |
| the existence of any secondary repayment sources; and | |
| the existence of a franchise relationship. |
Loan Portfolio Characteristics
As a result of the application of our underwriting criteria, at December 31, 1999 our loan portfolio had the following characteristics:
| Loan proceeds utilized 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) are 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 |
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borrower under the related Real Estate Loans. Other additional properties of certain borrowers or guarantors have been used as additional collateral in some instances. | ||
| The loans are generally guaranteed by the principal(s) of the borrowers. | |
| 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. |
Certain information regarding our portfolio as of December 31, 1999 is as follows:
| We had 96 loans outstanding with an aggregate principal amount of approximately $117.2 million. | |
| At December 31, 1999, all loans were paying as agreed and no loans were more than 31 days delinquent. | |
| Borrowers are principally involved in the lodging industry (97%). The remainder of the loan portfolio is comprised of three loans in the commercial office rental market. | |
| We have not loaned more than 10% of our assets to any single borrower. | |
| All loans provide for interest payments at fixed rates. The weighted average interest rate for our loans outstanding as of December 31, 1999 was 10.1%. | |
| All 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 between the borrower and us until the loan is fully amortized if such amortization period exceeds the stated maturity. Substantially all Real Estate Loans entitle the borrower to prepay all or part of the principal amount, subject to a prepayment penalty. | |
| The weighted average remaining contractual maturity for our portfolio of loans not including amounts outstanding to be paid off pursuant to the SBA 504 program was approximately 11.1 years. |
Delinquency and Collections
As of December 31, 1999, there were no loans greater than 31 days delinquent. Our collection procedures generally requires that:
| if a borrower fails to make a required monthly payment, the borrower will 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; and | |
| in the event a borrower becomes 45 days delinquent, a ten day demand letter will be sent to the borrower requiring the loan be brought current within ten days. After the expiration of the ten-day period, we may proceed with legal action. |
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Our 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. We will deliver a default notice and begin foreclosure and liquidation proceedings when we determine that pursuit of these remedies is the most appropriate course of action. We continually monitor loans for possible exposures to loss. In our analysis, we review various factors, including the value of the collateral securing the loan and the borrowers payment history. Based upon this analysis, a loan loss reserve will be established as considered necessary.
SBA Section 504 Program
We participate 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 by allowing us to originate loans with lower loan-to-value ratios. The SBA 504 Program provides assistance to small business enterprises in obtaining subordinated, long-term financing by guaranteeing debentures available through certified development companies for the purpose of acquiring land, building, 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, 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. We typically require at least 20% of the equity in a project to be contributed by the principals of the borrower. The SBA does not guarantee the first mortgage. Although the total sizes 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, 1999, we had approximately $860,000 in principal outstanding which is anticipated to be paid off by permanent subordinated financing provided by the SBA 504 Program.
Borrower Advances
We finance some projects during the construction phase. At December 31, 1999, we were in the process of monitoring construction projects with approximately $4.1 million in total commitments, of which $3.8 million had been funded. As part of the monitoring process to verify that the borrowers equity investment is utilized for its intended purpose, we hold a portion of the borrowers equity investment. These funds are itemized by category (e.g., interest, inventory, construction, contingencies, etc.) and are released by us 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, 1999, approximately $828,000 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
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code). As a REIT, we generally are not subject to Federal income tax (including any applicable alternative minimum tax) to the extent that we distribute at least 95% of our REIT taxable income to shareholders. We may, however, be subject to certain Federal excise taxes and state and local taxes on our income and property. REITs are subject to a number of organizational and operational requirements under the Code.
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Investment Manager
Our loans are managed by PMC Advisers pursuant to the Investment Management Agreement (the IMA) and property acquisitions, including the Hotel Properties, are supervised pursuant to a separate agreement entered into in June 1998 (the Lease Supervision Agreement and together with the IMA the IMAs.)
Upon receipt of a completed loan application, the Investment Managers credit department (which is also the credit department for PMC Capital) conducts:
| 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; | |
| a site inspection generally by a member of senior management of the Investment Manager; | |
| a review of the borrowers business experience; and | |
| a credit history and an analysis of debt service coverage and debt-to-equity ratios. |
The Investment Managers loan committee (which is also the loan committee of PMC Capital) is comprised of members of our senior management and has the responsibility to make a determination on each loan application. The Investment Managers 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 our 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 Managers servicing department (which is also the servicing department of PMC Capital) is responsible on an ongoing basis for the following items:
| obtaining all financial information required by the loan documents; | |
| verifying that adequate insurance remains in effect; | |
| continuing Uniform Commercial Code financing statements evidencing the loan, if required; | |
| collecting and applying loan payments; and | |
| monitoring delinquent accounts. |
We are managed by the same executive officers as PMC Capital and PMC Advisers. Three of our seven trust managers are directors or officers 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. We were 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, we generally pursue different prospective borrowers than PMC Capital. In order to further mitigate the potential for conflicts of interest, we have entered into a loan origination agreement (the Loan Origination Agreement) with PMC Capital and PMC Advisers. Pursuant to the Loan Origination Agreement, all loans that meet our underwriting criteria are presented to us first for funding. If we do not have available uncommitted funds, origination opportunities presented to us may be originated by PMC Capital or it subsidiaries. Many of our 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 our assets. In order to mitigate the risk from increasing our loan base through leveraged transactions, the IMAs provide PMC Advisers with a reduced fee for any loan acquired through additional borrowings.
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Pursuant to the IMA, we are charged fees, between 0.40% and 1.67% annually, based upon the average principal outstanding of our loans. In addition, PMC Advisers earns fees for its assistance with the issuance of our debt and equity securities. Such compensation includes a consulting fee equal to (i) 12.5% of any offering fees (underwriting or placement fees) incurred by us pursuant to the public offering or private placement of our common shares, and (ii) 50% of any issuance or placement fees incurred by us pursuant to the issuance of our debt securities or preferred shares of beneficial interest. Specific definitions of the terms and calculations of the averages described above are contained in the IMA. During 1998, the Lease Supervision Agreement commenced and provides an annual fee of 0.70% of the original cost of the properties to be paid to PMC Advisers for providing services relating to leases on our properties. In addition, the Lease Supervision Agreement provides for a fee relating to any acquisition of properties of 0.75% of the acquisition cost. Pursuant to the IMAs, including amendments, we incurred an aggregate of approximately $2.3 million; $2.6 million and $1.6 million in management fees for the years ended December 31, 1999, 1998 and 1997, respectively.
RISK FACTORS
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 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 identified in this Form 10-K. 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 our control. Although we believe 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 us or any other person that our objectives and plans will be achieved.
Ongoing Need For Additional Capital Since Earnings are Required to be Paid as Dividends
We will continue to need capital to fund loans and, to a more limited extent for the purchase of real estate. Historically, we have sold loans as part of structured financings, borrowed from financial institutions and have issued equity securities. A reduction in the availability of funds from financial institutions, the equity market or the asset backed securities market could have a material adverse effect on us. We must distribute at least 95% of our REIT taxable income to our shareholders to maintain our REIT status under the Code. As a result, that income will not be available to fund loan originations or acquire real estate. We expect to be able to continue to borrow from financial institutions and sell loans in the asset-backed securities market for the foreseeable future. If, however, we fail to obtain funds from such sources or from other sources to fund our loans, it could have a material adverse effect on our financial condition and our results of operations. If the market price of our common shares remains below the net book value of our assets, we do not anticipate selling additional equity securities during the year ending December 31, 2000. In addition, PMC Commercial has established criteria that limits its leverage to two times equity.
Fluctuations In Quarterly Results
Our quarterly operating results will fluctuate based on a number of factors, including, among others:
| the completion of a securitization transaction in a particular calendar quarter, | |
| the interest rates on the securities issued in connection with our securitization transactions, |
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| the volume of loans we originate and the timing of prepayment of our loans, | |
| changes in and the timing of the recognition of gains or losses on investments, | |
| the degree to which we encounter competition in our markets, and | |
| general economic conditions. |
As a result of these factors, results for any quarter should not be relied upon as being indicative of performance in future quarters.
Impact of Inflation
In an inflationary environment, we may experience problems selling loans in a securitization at a reasonable cost of funds. We primarily have a fixed interest rate portfolio. We anticipate that our working capital needs will call for the completion of a securitization sometime during the middle of the year ending December 31, 2000. If either U.S. Treasury rates were to increase sharply (over 1%) from present levels (approximately 6.44% for the 10-year U.S. Treasury at December 31, 1999) or spreads for asset backed securities similar to the type issued by us were to increase sharply (over 1%) from our estimate of present levels, we may not be able to complete a loan sale or have to defer a loan sale because of the reduction between the yield on our fixed interest rate loans and the interest needed to be paid to the purchasers.
Leverage
We have borrowed funds and intend to borrow additional funds through advances on our revolving credit facility and through the issuance of structured notes payable. As a result, we are leveraged. Private lenders have fixed dollar claims on our assets superior to the claims of the holders of our common shares. Leverage magnifies the effect that rising or falling interest rates have on our earnings. Any increase in the interest rate earned by us on investments in excess of the interest rate on the funds obtained from borrowings would cause our net income and earnings per share to increase more than they would without leverage, while any decrease in the interest rate earned by us on investments would cause net income and earnings per share to decline by a greater amount than they would without leverage. Leverage is thus generally considered a speculative investment technique. In order for us to repay indebtedness on a timely basis, we may be required to dispose of assets at a time which we would not otherwise do so and at prices which may be below the net book value of such assets. Dispositions of assets may adversely impact our results of operations. See Loan Prepayment Considerations and Interest Rate and Prepayment Risk.
Risks of Lending To Small Businesses
Our loan portfolio consists primarily of loans to small, privately owned companies. There is no publicly available information about these companies, and therefore we must rely on the due diligence of our Investment Manager to obtain information in connection with our investment decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by bank lenders. A borrowers ability to repay its loan may be adversely impacted by numerous factors, including the downturn in its industry or other negative economic conditions. Deterioration in a borrowers financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have an adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to expand or compete. Such companies may also experience changes in operating results and typically have highly leveraged capital structures. These factors may have an impact on the ultimate recovery of our loans to such businesses. Loans to small businesses, therefore, involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative.
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Portfolio Valuation
There is typically no public market or established trading market for the loans we originate. The illiquidity of most of our portfolio of loans may adversely affect our ability to dispose of such loans at times when it may be advantageous for us to liquidate such investments. Unlike traditional lenders, as a REIT, we do not establish general reserves for anticipated loan losses but we adjust quarterly the valuation of our portfolio to reflect the estimate of losses on the loan portfolio on a specific identification basis. Any changes in estimated values are recorded in our statement of operations as a provision for loan losses. Changes to the facts and circumstances of the borrower, the lodging industry and the economy may require the establishment of 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.
Loss of Pass-Through Tax Treatment
We qualify as a REIT under the Code. If a company meets certain diversification and distribution requirements under the Code, it qualifies for pass-through tax treatment. We would cease to qualify for pass-through tax treatment if we were unable to comply with these requirements. We are also subject to a 4% excise tax (and, in certain cases, corporate level income tax) if we fail to make certain distributions. Failure to qualify as a REIT would subject us to Federal income tax as if we were an ordinary corporation, resulting in a substantial reduction in both our net assets and the amount of income available for distribution to our shareholders.
Loan Prepayment Considerations
The terms of our loans originated generally provide that voluntary prepayments of principal of the loans 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 our 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 loans 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
Our ability to achieve certain of our investment objectives will depend in part on our ability to borrow funds on favorable terms or issue equity at reasonable prices. There can be no assurance that such borrowings or issuances can be achieved. The net income of our lending operations is materially dependent upon the spread between the rate at which we borrow funds (typically either short-term at variable rates or long-term at fixed rates) and the rate at which we loan these funds (typically long-term at fixed rates) and the lease revenues on owned properties. During periods of changing interest rates, interest rate mismatches could negatively impact our net income, dividend yield, and the market price of our common shares. As interest rates declined during 1997 and into 1998, we experienced loan prepayments, and such prepayments, as well as scheduled repayments, have generally been re-loaned at lower rates. This high volume of loan prepayments has had an adverse effect on our business, financial condition and results of operations and could have an affect on our ability to maintain distributions at current levels. The loans we originated have prepayment fees charged, as described above, which we believe help mitigate the likelihood and effect of principal prepayments. Prepayments continued at accelerated levels through the second quarter of 1999. However, as a result of recent changes in the credit markets, the pace of prepayment activity decreased during the third and fourth quarters of 1999. We believe that as a result of the current interest rate environment the prepayment activity may continue at these lower levels during the year ending December 31, 2000.
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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 ADA 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 we believe that the properties that we own or finance 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 Hotel Properties, costs and fines associated with the ADA are the responsibility of the tenant. However, a substantial expense may affect the borrowers or tenants ability to pay their obligations, and consequently, our cash flow and the amounts available for distributions to shareholders may be adversely affected.
Reports to Shareholders
We provide annual reports to the holders of Common Shares containing audited financial statements with a report thereon from our independent public accountants and, upon request, quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year.
Employees
We have no salaried employees. The Investment Manager provides all personnel required for our operations.
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Item 2. PROPERTIES
We operate from the headquarters of the Investment Manager in Dallas, Texas, and through their loan production offices in Georgia and Arizona.
At December 31, 1999, we owned 30 Hotel Properties. These properties are leased pursuant to a sale/leaseback transaction. No lease revenue from any of the 30 properties is greater than 2% of our annual revenues. Set forth below is a table describing the location, number of rooms and year built relating to each of these properties.
Rooms in | Year | |||||||||
City | State | Hotel | Built | |||||||
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 | |||||||
Macomb | Illinois | 60 | 1995 | |||||||
Sycamore | Illinois | 60 | 1996 | |||||||
Plainfield | Indiana | 60 | 1992 | |||||||
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 | |||||||
Marysville | Ohio | 79 | 1990 | |||||||
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 | |||||||
1,834 | ||||||||||
Item 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to various proceedings and claims, the resolution of which will not, in managements opinion, have a material adverse effect on our financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of the year ended December 31, 1999.
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PART II
Item 5. MARKET FOR THE REGISTRANTS 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 29, 2000, there were 784 holders of record of Common Shares and the last reported sales price of the Common Shares was $10.75. 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 us for each such period.
Regular | ||||||||||||
Dividends Per | ||||||||||||
Quarter Ended | High | Low | Share | |||||||||
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 | ||||||
March 31, 1999 | $ | 16.69 | $ | 13.75 | $ | 0.460 | ||||||
June 30, 1999 | $ | 16.13 | $ | 14.13 | $ | 0.460 | ||||||
September 30, 1999 | $ | 14.75 | $ | 12.88 | $ | 0.460 | ||||||
December 31, 1999 | $ | 13.25 | $ | 9.75 | $ | 0.460 |
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for the five years ended December 31, 1999. The following data should be read in conjunction with our consolidated financial statements and the notes thereto and Managements 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 our consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report is included elsewhere in this Form 10-K.
Years Ended December 31, | |||||||||||||||||||||
1999 | 1998 | 1997 | 1996 | 1995 | |||||||||||||||||
(In thousands, except per share information) | |||||||||||||||||||||
Revenues: | |||||||||||||||||||||
Interest income-loans | $ | 13,269 | $ | 13,496 | $ | 12,378 | $ | 8,528 | $ | 5,610 | |||||||||||
Lease income | 7,531 | 3,314 | - | - | - | ||||||||||||||||
Interest and dividends - other investments | 281 | 321 | 643 | 1,235 | 325 | ||||||||||||||||
Other income | 919 | 2,177 | 792 | 385 | 295 | ||||||||||||||||
Total revenues | 22,000 | 19,308 | 13,813 | 10,148 | 6,230 | ||||||||||||||||
Expenses: | |||||||||||||||||||||
Interest | 7,023 | 4,289 | 1,726 | 1,805 | 222 | ||||||||||||||||
Depreciation | 2,213 | 976 | - | - | - | ||||||||||||||||
Advisory and servicing fees, net | 2,173 | 1,809 | 1,449 | 992 | 945 | ||||||||||||||||
Other | 327 | 863 | 249 | 174 | 167 | ||||||||||||||||
Total expenses | 11,736 | 7,937 | 3,424 | 2,971 | 1,334 | ||||||||||||||||
Net income | $ | 10,264 | $ | 11,371 | $ | 10,389 | $ | 7,177 | $ | 4,896 | |||||||||||
Weighted average common shares outstanding | 6,530 | 6,498 | 6,242 | 4,755 | 3,451 | ||||||||||||||||
Basic and diluted earnings per common share | $ | 1.57 | $ | 1.75 | $ | 1.66 | $ | 1.51 | $ | 1.42 | |||||||||||
Dividends per common share | $ | 1.84 | $ | 1.78 | $ | 1.65 | $ | 1.55 | $ | 1.38 | |||||||||||
Return on average assets(1) | 5.1 | % | 6.9 | % | 8.6 | % | 7.6 | % | 8.8 | % | |||||||||||
Return on average common beneficiaries equity(2) | 11.1 | % | 12.2 | % | 11.9 | % | 11.3 | % | 10.2 | % | |||||||||||
December 31, | |||||||||||||||||||||
1999 | 1998 | 1997 | 1996 | 1995 | |||||||||||||||||
(In thousands) | |||||||||||||||||||||
Loans receivable, net | $ | 115,265 | $ | 119,712 | $ | 109,132 | $ | 91,981 | $ | 59,129 | |||||||||||
Real estate investments, net | $ | 70,683 | $ | 61,774 | $ | - | $ | - | $ | - | |||||||||||
Total assets | $ | 197,237 | $ | 196,690 | $ | 115,877 | $ | 121,749 | $ | 59,797 | |||||||||||
Notes payable | $ | 97,757 | $ | 95,387 | $ | 18,721 | $ | 26,648 | $ | 7,920 | |||||||||||
Beneficiaries equity | $ | 91,932 | $ | 93,437 | $ | 91,242 | $ | 85,829 | $ | 48,183 | |||||||||||
Total liabilities and beneficiaries equity | $ | 197,237 | $ | 196,690 | $ | 115,877 | $ | 121,749 | $ | 59,797 | |||||||||||
(1) Based on average annual value of all assets which is the book value of our total assets or any person wholly-owned (directly or indirectly) by us 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. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
General
We are primarily a commercial lender that originates loans to small business enterprises in the lodging industry that are primarily collateralized by first liens on the real estate of the related business. During the years ended December 31, 1999, 1998 and 1997, we originated and funded $17.5 million, $43.0 million and $43.1 million of loans. A substantial portion of these loan originations were to corporations and individuals in the lodging industry. We anticipate the dollar amount of loans to be originated in 2000 should be consistent with 1999 levels. See Competition and Liquidity and Capital Resources.
During March 1999, we completed the acquisition of four motel properties (the Four Amerihost Properties and, collectively with the Amerihost properties previously acquired, the Hotel Properties) from Amerihost Properties, Inc. or its subsidiaries (Amerihost) for $10.8 million. This acquisition completes the purchase of the Hotel Properties under the agreement with Amerihost, dated May 21, 1998, pursuant to which we agreed to acquire the 30 Hotel Properties in a sale/leaseback transaction. Amerihost Properties, Inc. is a public entity that files periodic reports with the Securities and Exchange Commission (SEC). Additional information about Amerihost can be obtained from the SECs website at http://www.sec.gov.
As of December 31, 1999, our total loan portfolio outstanding was $117.0 million ($115.3 million after reductions for loans purchased at a discount, deferred commitment fees and loan loss reserves) with a weighted average contractual interest rate of approximately 10.1%. The weighted average contractual interest rate does not include the effects of the amortization of discount on purchased loans, commitment fees on funded loans or prepayment fees earned. The annualized average yields on loans, including all loan fees and prepayment fees earned, for the years ended December 31, 1999, 1998 and 1997 were approximately 11.8%, 13.1% and 12.4%, respectively.
As of December 31, 1999, we had no loans which were greater than 31 days delinquent. We have established a reserve in the amount of $100,000 against a loan that we have determined to be a potential problem loan. The aggregate principal balance outstanding of the problem loan at December 31, 1999 was approximately $1 million. In the event this loan is required to be liquidated, management estimates the collateral will equal or exceed the principal balance outstanding less the related reserve.
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Property Acquisition
The following table shows summarized financial information for Amerihost Properties, Inc. (derived from the Amerihost Properties, Inc. public filings) as of December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998 and 1997, as follows:
1999 | 1998 | ||||||||||||
(In thousands) | |||||||||||||
BALANCE SHEET DATA: | |||||||||||||
Investment in hotel assets | $ | 86,103 | $ | 96,669 | |||||||||
Cash and short term investments | 3,766 | 4,494 | |||||||||||
Total assets | 103,108 | 115,281 | |||||||||||
Total liabilities | 88,927 | 96,965 | |||||||||||
Shareholders equity | 14,181 | 18,316 |
Years Ended December 31, | |||||||||||||
1999 | 1998 | 1997 | |||||||||||
(In thousands) | |||||||||||||
INCOME STATEMENT DATA: | |||||||||||||
Total Revenue | $ | 76,058 | $ | 68,618 | $ | 62,666 | |||||||
Operating Income | 4,780 | 3,084 | 1,980 | ||||||||||
Net Income (loss) | 201 | (2,796 | ) | (966 | ) |
Amerihost Properties, Inc. is a public entity that files periodic reports with the SEC. Additional information about Amerihost can be obtained form the SECs website at http://www.sec.gov.
The following tables show statistical data regarding our Hotel Properties (1):
Years Ended December 31, | ||||||||||||
1999 | 1998 | % Increase | ||||||||||
Occupancy | 59.45 | % | 58.38 | % | 1.8% | |||||||
ADR(2) | $ | 56.00 | $ | 53.35 | 5.0% | |||||||
RevPAR(3) | $ | 33.29 | $ | 31.15 | 6.9% | |||||||
Revenue | $ | 22,255,438 | $ | 20,661,004 | 7.7% | |||||||
Rooms Rented | 397,431 | 387,260 | 2.6% | |||||||||
Rooms Available | 668,548 | 663,294 | 0.8% |
(1) | The tables show financial and statistical data of the properties for the periods presented which includes periods prior to the date we acquired the properties. Amerihost has provided all data. |
(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. |
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Competition
Our primary competition comes from banks, financial institutions and other lending companies. Additionally, there are lending programs which have been established by national franchisers in the lodging industry. Some of these competitors have greater financial and larger managerial resources than us. Competition increased as the financial strength of the banking and thrift industries improved. In our opinion, there continues to be competitive lending activity at advance rates and interest rates which are considerably more aggressive than those offered by us. In order to maintain a quality portfolio, we will continue to adhere to our historical underwriting criteria, and as a result, certain loan origination opportunities will not be funded by us. We believe we compete effectively with such entities on the basis of the lending programs offered, the interest rates, maturities and payment schedules, the quality of our service, our reputation as a lender, the timely credit analysis and decision-making processes, and the renewal options available to borrowers.
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.
We follow 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 our Board of Trust Managers when significant doubt exists as to the ultimate realization of the loan. As of December 31, 1999, a $100,000 loan loss reserve had been established. The determination of whether significant doubt exists and whether a loan loss provision is necessary for each loan requires judgment and considers the facts and circumstances existing at the evaluation date.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Our net income during the years ended December 31, 1999 and 1998 was $10.3 million and $11.4 million, or $1.57 and $1.75 per share, respectively. The basic weighted average shares outstanding remained constant at approximately 6.5 million for the years ended December 31, 1999 and 1998. Our revenues increased by $2.7 million, or 14%, from $19.3 million during the year ended December 31, 1998 to $22.0 million during the year ended December 31, 1999 due primarily to the lease revenue on owned properties commencing June 1998 and March 1999. Equity ownership in properties, while causing increased revenues, also causes increased expenses (primarily depreciation, interest costs and advisory fees). While there was a decrease in net income, our funds from operations (FFO) increased. The difference between our net income and our FFO was the effect of depreciation (see Funds From Operations). Depreciation expense increased by $1.2 million, or 127%, from $1.0 million for the year ended December 31, 1998 to $2.2 million during the year ended December 31, 1999. The increase in depreciation expense resulted from the acquisition of properties during June 1998 and March 1999.
Interest income - loans decreased by $227,000 (2%), from $13.5 million during the year ended December 31, 1998 to $13.3 million during the year ended December 31, 1999. Interest income-loans represents income generated primarily through interest earned on our outstanding loan portfolio and the accretion of deferred commitment fees. This $227,000 decrease in interest income-loans was primarily attributable to the impact of a continued decline in the weighted average contractual interest rate on loans outstanding. The weighted average contractual interest rate was 10.3% at December 31, 1998 compared to 10.1% at December 31, 1999. Partially offsetting the decrease in weighted average interest rates was an increase in our average outstanding loan portfolio. The average outstanding loan portfolio increased by $2.6 million (2%), from $118.9 million during the year ended December 31, 1998 to $121.5 million during the year ended December 31, 1999.
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Lease income increased by $4.2 million (127%), from $3.3 million during the year ended December 31, 1998 to $7.5 million during the year ended December 31, 1999. We acquired 26 Hotel Properties during June 1998. As a result, for the year ended December 31, 1998, we earned lease revenue for a six-month period while the lease income for the year ended December 31, 1999 includes lease revenue for the entire year. In addition, lease income increased as a result of lease revenue derived from the Four Amerihost Properties which were acquired in March 1999.
Interest and dividends - other investments decreased by $40,000 (12%), from $321,000 during the year ended December 31, 1998 to $281,000 during the year ended December 31, 1999. The average yields on short-term investments during the year ended December 31, 1999 decreased by .5% from 5.0% during the year ended December 31, 1998 to 4.5% during the year ended December 31, 1998. Additionally, the average short-term investments of the Company decreased by $176,000 (3%), from $6,420,000 during the year ended December 31, 1998 to $6,244,000 during the year ended December 31, 1999.
Other income decreased by $1.3 million (58%), from $2.2 million during the year ended December 31, 1998 to $919,000 during the year ended December 31, 1999. Other income consists of: (i) prepayment fees, (ii) amortization of construction monitoring fees, (iii) late and other loan fees and (iv) miscellaneous collections. The decrease was principally attributable to the reduced amount of prepayment fees collected during the year ended December 31, 1999 of $620,000 compared to $1.8 million during the year ended December 31, 1998. During the years ended December 31, 1999 and 1998, 16 and 25 loans in the amounts of approximately $16.1 million and $26.0 million, respectively, paid in full prior to their stated maturity. Additionally, one of the loans which paid in full during the year ended December 31, 1998 had a significant penalty. Prepayment fee income as a percentage of loans which paid in full was less during the year ended December 31, 1999 than during the year ended December 31, 1998 because the Yield Maintenance Premiums were not as large due to (i) the lower interest rates on the loans which prepaid and (ii) the higher interest rates on U.S. Treasuries. Prepayment fees result in one-time increases in our other income, but will result in a long-term reduction in income if we are unable to generate new loans with the proceeds of these prepayments with interest rates equal to or greater than the rates of the loans which were prepaid. Prepayments generally increase during times of declining interest rates. See Part 1, Business-Risk Factors-Interest Rate and Prepayment Risk. The borrowers decision to prepay will depend on factors such as prepayment penalties and the availability of alternative lending sources. As interest rates remained at low levels, borrowers appeared more willing to pay the prepayment penalties in order to obtain the lower interest rate. See Part 1, Business-Risk Factors-Loan Prepayment Considerations.
Interest expense increased by $2.7 million (64%), from $4.3 million during the year ended December 31, 1998 to $7.0 million during the year ended December 31, 1999. The increase was primarily a result of the issuance of the 1998 Notes during June 1998, the proceeds of which were used to purchase the Hotel Properties, the assumption of notes on the Four Amerihost Properties during March 1999, new mortgages on six of the Hotel Properties primarily entered into during the third quarter of 1999 and increases in the borrowings under our revolving credit facility used to originate loans. This increase was partially offset by a reduction in interest expense from the redemption of the remaining 1996 Notes. Interest expense consisted primarily of:
Years Ended December 31, | ||||||||
1999 | 1998 | |||||||
(In thousands) | ||||||||
Revolving Credit Facility | $ | 2,601 | $ | 1,069 | ||||
1996 Notes | 108 | 802 | ||||||
1998 Notes | 3,393 | 2,105 | ||||||
Mortgages on Hotel Properties | 722 | - | ||||||
Other | 199 | 313 | ||||||
$ | 7,023 | $ | 4,289 | |||||
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Advisory and servicing fees to affiliate, net increased by $364,000 (20%), from $1.8 million during the year ended December 31, 1998 to $2.2 million during the year ended December 31, 1999.
Pursuant to the investment management agreement (IMA), we are charged fees between 0.40% and 1.67% annually (the Investment Management Fees) based upon the average principal outstanding of our loans. While PMC Advisers bears substantially all of the costs associated with our operations, we pay certain expenses, including, direct transaction costs incident to the acquisition and disposition of investments, legal and auditing fees and expenses, the fees and expenses of our trust managers who are not officers (the Independent Trust Managers), the costs of printing and mailing proxies and reports to shareholders and the fees and expenses of our custodian and transfer agent. We, rather than PMC Advisers, are also required to pay expenses associated with any litigation and other extraordinary or non-recurring expenses.
In addition, we entered into a separate agreement with PMC Advisers relating to the supervision of the sale-leaseback agreements between Amerihost and us (the Lease Supervision Agreement and, together with the IMA, the IMAs). We are required to pay an annual fee (the Lease Supervision Fee) of 0.70% of the original cost of the Hotel Properties ($73.0 million). Currently, the Lease Supervision Fee is $511,000 per annum. In the event the Lease Supervision Agreement with PMC Advisers is terminated or not renewed by PMC Commercial (other than as a result of a material breach by PMC Advisers) or terminated by PMC Advisers (as a result of a material breach by PMC Commercial), PMC Advisers would be entitled to receive the Lease Supervision Fee for a period of five years from the termination date.
Fees associated with the IMAs consist of the following:
Years Ended December 31, | |||||||||
1999 | 1998 | ||||||||
(In thousands) | |||||||||
Lease Supervision Fee | $ | 573 | $ | 218 | |||||
Investment Management Fee | 1,746 | 2,422 | |||||||
Total fees incurred | 2,319 | 2,640 | |||||||
Less: | |||||||||
Fees capitalized as cost of originating loans | (65 | ) | (198 | ) | |||||
Fees capitalized as cost of property acquisitons and structured financing | (81 | ) | (633 | ) | |||||
Advisory and servicing fees to affiliate, net | $ | 2,173 | $ | 1,809 | |||||
The decrease in Investment Management Fees of $676,000 (28%) is primarily due to the reduction in fees incurred on property acquisitions and structured financings. During 1998, $166,000 was capitalized as part of the structured financing completed in June 1998, and a $467,000 fee charged for the acquisition of the Hotel Properties during June 1998 was capitalized as a cost of the properties compared to $81,000 of fees charged related to the acquisition of the Four Amerihost Properties capitalized as a cost of the properties in 1999. The average outstanding loans as defined by the IMA decreased by $1.0 million (1%), from $118.3 million during the year ended December 31, 1998 to $117.3 million during the year ended December 31, 1999. In addition, the average common equity capital as defined in the IMA increased by $800,000 (1%), from $93.6 million during the year ended December 31, 1998 to $94.4 million during the year ended December 31, 1999.
The Lease Supervision Fee increased as a result of the agreement commencing on June 30, 1998 with the purchase of the Hotel Properties. We earned six months of income in 1998 compared to a full year in 1999.
Depreciation expense increased by $1.2 million (127%), from $976,000 during the year ended December 31, 1998 to $2.2 million during the year ended December 31, 1999. This increase is attributable to depreciation of the Hotel Properties acquired during June 1998 and March 1999.
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Write-off of transaction costs were $0.6 million during the year ended December 31, 1998. This expense is attributable to a one-time charge for costs during the year ended December 31, 1998 related to the termination of a proposed merger. There were no such charges for the year ended December 31, 1999.
General and administrative expenses increased by $3,000 (2%), from $182,000 during the year ended December 31, 1998 to $185,000 during the year ended December 31, 1999. The general and administrative expenses remained at low levels and stable since the majority of the expenses are incurred by PMC Advisers pursuant to the IMA.
Legal and accounting fees increased by $70,000 (97%), from $72,000 during the year ended December 31, 1998 to $142,000 during the year ended December 31, 1999. This increase is attributable to an increase in corporate activity when comparing the year ended December 31, 1999 to the year ended December 31, 1998.
Federal income taxes. As we are 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, 1998 Compared to the Year Ended December 31, 1997
Our net income 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 our revenues is interest income on loans. Interest income-loans is dependent on the interest rates for our outstanding loans and the dollar volume of outstanding loans. Since we borrow funds to generate loan origination, our net income is dependent upon the spread at which we borrow funds and the rate at which we loan those funds. See Part 1, Business-Risk Factors-Interest Rate and Prepayment Risk. Over the past several years, the spread has decreased. Consequently, we have sought to increase our outstanding loan portfolio, our fees related to lending operations and our 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 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. Our earnings per share during the years ended December 31, 1998 and 1997 includes the effect of stock issuances under our Dividend Reinvestment and Share Purchase Plan (DRP). Accordingly, our weighted average shares outstanding increased by 4%, from 6,242,182 during the year ended December 31, 1997, and 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 we generated primarily through interest earned on our 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 our outstanding loan portfolio during the year ended December 31, 1998 as a result of the re-allocation of our 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 26 Hotel Properties we acquired on June 30, 1998.
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 our available funds in short-term investments pending the origination of loans with such funds and the interest earned on our restricted investments. Interest and dividends -
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other investments will usually increase temporarily following completion of a financing. 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 our outstanding unfunded commitments. However, the proceeds from the 1998 Private Placement (completed in June 1998) were immediately used to purchase the Hotel Properties, having little effect on the average short-term investment balance. Our average short-term investments 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 our 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 our lending activities. This increase in other income was primarily attributable to an increase in income recognized from prepayment fees of $1.4 million, from $470,000 during the years ended December 31, 1997 to $1.8 million 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. Prepayments generally increase during times of declining interest rates. We experienced a 42% increase in the dollar amount of prepaid loans during 1998 as compared to 1997. See Item 1, Business-Risk Factors-Loan Prepayment Considerations and -Interest Rate and Prepayment Risk.
Interest expense increased by $2.6 million (148%), 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 our revolving credit facility.
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 $2.1 million), the revolving credit facility (approximately $1.1 million), 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 $1.5 million), amortization of deferred borrowing costs (approximately $95,000) and interest incurred on borrower advances (approximately $83,000).
Advisory and servicing fees to affiliate, net, consist primarily of the servicing and advisory fees paid to the Investment Manager and depreciation related to the 26 Hotel Properties. We are required to pay the Lease Supervision Fee of 0.70% of the initial cost of the Amerihost Properties ($62.2 million) under the Lease Supervision Agreement. At December 31, 1998, the annual fee was approximately $0.4 million. 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, we incurred an aggregate of approximately $2.6 million in management fees for the year ended December 31, 1998 including $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 Hotel 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 $1.6 million during the year ended December 31, 1997 to $1.8 million 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 our loans and increases in common equity capital, including
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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 26 Hotel Properties we acquired on June 30, 1998.
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 $0.6 million during the year ended December 31, 1998. This expense is attributable to a one-time charge for costs during the year ended December 31, 1998 related to the termination of a proposed merger. There were no such charges for the year ended December 31, 1997.
Federal Income Taxes. As we are 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
We generated $12.1 million and $14.2 million from operating activities during the years ended December 31, 1999 and 1998, respectively. The primary source of funds is our net income. The decrease of $2.1 million (15%) was primarily due to several factors including (i) the change related to Due to affiliates which decreased by $1,097,000 from a source of funds of $888,000 during the year ended December 31, 1998 to a use of funds of $209,000 during the year ended December 31, 1999, (ii) the change related to other liabilities which decreased by $1.2 million from a source of funds of $1.6 million during the year ended December 31, 1998 to a source of funds of $357,000 during the year ended December 31, 1999 and (iii) the decrease in net income of $1.1 million from $11.4 million during the year ended December 31, 1998 to $10.3 million during the year ended December 31, 1999. These decreases were partially offset by the change related to depreciation which increased by $1.2 million (127%), from $976,000 during the year ended December 31, 1998 to $2.2 million during the year ended December 31, 1999. This increase is attributable to depreciation of the Hotel Properties acquired during June 1998 and March 1999.
During 1999, our investing activities provided us with a net source of funds of $4.1 million compared to a net use of funds of $81.1 million during the year ended December 31, 1998. The increased source of funds of $85.2 million was due to: (i) the purchase of the Amerihost Properties in June 1998 for $62.7 million, and (ii) a decrease in the use of funds $25.5 million in the loans funded during the year ended December 31, 1999 compared to the year ended December 31, 1998.
During 1999, our financing activities provided us with a net use of funds of $16.3 million compared to a net source of funds of $67.1 million from financing activities during the year ended December 31, 1998. During the year ended December 31, 1998 we issued $66.1 million of the 1998 Notes and increased our revolving credit facility in order to purchase the 26 Hotel Properties in 1998. We did not have any structured financing completed during the year ended December 31, 1999. We borrowed funds under our credit facility in order to acquire the Four Amerihost Properties in March 1999 and to fund loans originated. Our main use of funds from financing activities is the payment of dividends as part of our requirements to maintain REIT status and the payment of principal on notes payable. Dividends paid increased $671,000 from $11.1 million during the year ended December 31, 1998, to $11.8 million during the year ended December 31, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
The primary use of our funds is to originate loans and, to a lesser degree, acquire commercial real estate. We also use funds for payment of dividends to shareholders, management and advisory fees (in lieu of salaries and other administrative overhead), general corporate overhead and interest and principal payments on borrowed funds.
As a REIT, we must distribute to our shareholders at least 95% of our REIT taxable income to maintain our tax status under the Code. As a result, those earnings will not be available to fund investments. In order to maintain and increase the investment portfolio, we have a continuing need for capital. We have historically met our capital needs through borrowings under our credit facility, structured sales/financings of our loan portfolio and the issuance of common shares. A reduction in the availability of these sources of funds could have a material adverse effect on our financial condition and operating results. We expect to obtain capital to fund loans through borrowings as further discussed below.
At December 31, 1999, we had $228,000 of cash and cash equivalents and approximately $7.9 million of total loan commitments and approvals outstanding to nine small business concerns predominantly in the lodging industry. Of the total loan commitments and approvals outstanding, we had approximately $239,000 of loan commitments outstanding pertaining to two partially funded construction loans and $113,000 of commitments under the SBA 504 takeout program at December 31, 1999. The weighted average interest rate on loan commitments at December 31, 1999 was 9.6%. These commitments are made in the ordinary course of business and, in managements 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 applicable 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 Loan Origination Agreement, if we do not have available capital to fund outstanding commitments, PMC Advisers will refer such commitments to our affiliates and we will receive no income.
In general, to meet our liquidity requirements, including expansion of our outstanding loan portfolio and/or acquisition of properties, we intend to use:
| our revolving credit facility as described below; | |
| borrowings collateralized by the properties; | |
| issuance of debt securities including securitizations of loans or properties; | |
| placement of corporate long-term borrowings; and/or | |
| offering of additional equity securities. |
We believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs. Our ability to continue our historical growth, however, will depend on our ability to borrow funds and/or issue equity on acceptable terms.
We have a revolving credit facility (the Revolver) which provides funds to originate loans and, on a limited basis, to purchase commercial real estate. The Revolver, as amended in November 1999, provides us with credit availability up to the lesser of $60 million or an amount equal to the sum of 60% of the value of the projects underlying the loans collateralizing the borrowings not to exceed 85% of the amount of the loans outstanding. At December 31, 1999, we had $34.6 million of outstanding borrowings under the Revolver and $25.4 million additional availability thereunder, as amended. We are charged interest on the balance outstanding under the credit facility at our election of either the prime rate of the lender or 162.5 basis points over the 30, 60 or 90 day LIBOR. The facility matures on November 27, 2002 except for $15 million which matures April 30, 2000 at which point our revolving credit facility will provide credit availability up to $45 million.
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With regard to our Hotel Properties, we are currently pursuing financing sources including both mortgages on individual properties owned by us and a combination of smaller pools of properties identified for inclusion in commercial mortgage backed securities (CMBS). The Hotel Properties continue to show overall improvements in ADR, occupancy and RevPAR and consequently we believe that they have not achieved their optimal cash flow. In addition, the interest rate environment has recently increased substantially. Thus, the amount of leverage currently available through CMBS transactions is lower than management believes is appropriate and/or the cost of the related leverage is higher than management believes is warranted. Consequently, the CMBS markets may be considered in the future to issue debt in a securitization. As of December 31, 1999, we mortgaged six of the Hotel Properties for $8.6 million with a weighted average interest rate of 7.66%. The related notes each have terms of five years (except for one note), amortization periods of 20 years, and rates ranging from 7.44% to 8.00%. The remaining notes term is nine years, has no prepayment penalty and has an interest rate reset at the end of its fifth year.
With regard to our loans, we are in the process of developing a loan pool of approximately $40 to $50 million for a securitization transaction which, if market conditions are conducive, is anticipated to be completed during the second or third quarter of 2000. We would have liked to complete a securitization transaction sooner, but we delayed due to higher than anticipated prepayments in our current loan portfolios and a decrease in loan funding in the fourth quarter of 1999. The reduced levels of loan funding have continued so far in the first quarter of 2000. In addition, based on current market interest rates, the cost of funds from securitizing a pool of loans has increased. As a result, we will continually monitor the market for selling securitizations to determine the most opportune time to complete a transaction. Due to the current market conditions, we have slowed the growth of our portfolio until the spread we can achieve on new loan originations increases. We anticipate that based upon these market conditions, in order to accomplish a cost effective securitization, a joint-venture transaction with PMC Capital would be required. The benefits of having a joint securitization include the expected enhanced pricing and/or a more favorable subordinated structure. In order to co-securitize with us, PMC Capital must receive permission from the Investment Company Division of the SEC. PMC Capital has commenced that process; and there can be no assurances that the required permission will be received.
Since our outstanding commitments are less than the amount available on our Revolver, the sources of funds described above will be adequate to meet our existing obligations. In order to increase our outstanding investments, there can be no assurance we will be able to raise funds through these financing sources. If these sources are not available at a reasonable cost, we anticipate that we will continue originating loans at a reduced rate. In order to mitigate the interest rate risk of approximately $35 million of variable rate debt outstanding on our Revolver, we may (i) purchase interest rate hedges; (ii) have to issue debt at decreased loan-to-value ratios with increased interest rates and/or (iii) sell assets.
Year 2000 Compliance Update
Current: 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 January 1, 2000, when current and future dates presented a lower two digit year number than dates in the prior century. The Year 2000 issue still potentially exists as certain dates are passed in the future. Similar to most financial services providers, we are subject to the potential impact of the Year 2000 issue due to the nature of financial information. Potential impacts on us may arise from software, computer hardware, and other equipment both within our direct control and outside of our control, yet with which we electronically or operationally interface. Regulators have focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification has been addressed as a key safety and soundness issue in conjunction with these regulatory concerns. To date, we have not had any material Year 2000 problems and we do not anticipate any problems. The Investment Manager performs all of our operations. Our investment advisor is currently in the process of changing their servicing and financial software. These software changes are not related to any Year 2000 concerns.
History: During 1998, the Investment Manager formed an internal review team to address, identify and resolve any Year 2000 issues that encompasses any of our operating and administrative areas. In addition, executive
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management monitored the status of our Year 2000 remediation plans, where necessary, as they relate to internally used software, computer hardware and use of computer applications in our servicing processes.
The Investment Manager only used internal resources to test our software for Year 2000 modifications. It has substantially completed its Year 2000 assessment and re-mediation. In addition they have completed formal communications with our significant suppliers and determined that we do not appear to be vulnerable to those third parties failure to re-mediate their own Year 2000 issues. The total project cost was not material. The majority of the project cost was attributable to the Investment Managers employee time necessary to test the present system and to meet future industry requirements. Management believes that we have devoted the necessary resources to identify and resolve significant Year 2000 issues in a timely manner.
FUNDS FROM OPERATIONS AND DIVIDENDS
Funds From Operations
We consider FFO to be an 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 our performance. Our 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. Our formulation of FFO set forth 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 our 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 our operating performance. For a complete discussion of our cash flows from operations, see Cash Flow Analysis.
Our FFO for the years ended December 31, 1999 and 1998 was computed as follows:
Year Ended December 31, | ||||||||
1999 | 1998 | |||||||
(In thousands) | ||||||||
Net income | $ | 10,264 | $ | 11,371 | ||||
Add depreciation | 2,213 | 976 | ||||||
FFO | $ | 12,477 | $ | 12,347 | ||||
Basic weighted average shares outstanding | 6,530 | 6,498 | ||||||
Dividends
During January 2000, we paid $0.46 per share in dividends to common shareholders of record on December 31, 1999. During April, July and October 1999, we paid $0.46 per share in dividends to common shareholders of record on March 31, 1999, June 30, 1999 and September 30, 1999, respectively. The Board of Trust Managers has determined that the quarterly dividend is expected to be $0.46 per share through the year ended December 31, 2000. While FFO has continued to meet managements expectations, many factors are considered in dividend policy, consequently dividends cannot be guaranteed.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk associated with changes in interest rates.
Our balance sheet consists of two items subject to interest rate risk. The majority of our 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. Significant reductions in interest rates, however, can prompt increased prepayments of our loans, resulting in possible decreases in long-term revenues due to re-investment of the prepayment proceeds at lower interest rates. See Item 1,Business-Risk Factors-Interest Rate and Prepayment Risk. Our liabilities consist primarily of the 1998 Notes of approximately $47.8 million at December 31, 1999, debt related to our Hotel Properties of approximately $15.3 million and amounts outstanding under our Revolver of approximately $34.6 million. The 1998 Notes and the debt related to our Hotel Properties are payable at fixed rates of interest, so changes in interest rates do not affect the related interest expense. However, our 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 at December 31, 1999 of 7.75% (LIBOR plus 1.63%), on an annualized basis interest expense would result in an increase of approximately $692,000 on the amount outstanding of $34.6 million at December 31, 1999.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is hereby incorporated by reference to our 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.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to our 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 17, 2000.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to our 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 17, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to our 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 17, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to our 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 17, 2000.
33
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 -
(2) Financial Statement Schedules -
(3) Exhibits
(b) Reports on Form 8-K:
None
34
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 our behalf by the undersigned, hereunto duly authorized.
PMC Commercial Trust |
By: | /s/ Lance B. Rosemore |
|
|
Lance B. Rosemore, President |
Dated March 29, 2000
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.
Name | Title | Date | ||
/s/ DR. ANDREW S. ROSEMORE Dr. Andrew S. Rosemore |
Chairman of the Board of Trust Managers, Chief Operating Officer and Trust Manager | March 29, 2000 | ||
/s/ LANCE B. ROSEMORE Lance B. Rosemore |
President, Chief Executive Officer, Secretary and Trust Manager (principal executive officer) | March 29, 2000 | ||
/s/ BARRY N. BERLIN Barry N. Berlin |
Chief Financial Officer (principal financial and accounting officer) | March 29, 2000 | ||
/s/ IRVING MUNN Irving Munn |
Trust Manager | March 29, 2000 | ||
/s/ ROY H. GREENBERG Roy H. Greenberg |
Trust Manager | March 29, 2000 | ||
/s/ NATHAN COHEN Nathan Cohen |
Trust Manager | March 29, 2000 | ||
/s/ DR. IRA SILVER Dr. Ira Silver |
Trust Manager | March 29, 2000 | ||
/s/ DR. MARTHA GREENBERG Dr. Martha Greenberg |
Trust Manager | March 29, 2000 |
35
PMC COMMERCIAL TRUST
Page | |||||
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 III - Real Estate and Accumulated Depreciation | F-20 |
F-1
Report of Independent Accountants
To the Shareholders and Board of Trust Managers
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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Companys 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 auditing standards generally accepted in the United States, 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
F-2
PMC COMMERCIAL TRUST AND SUBSIDIARIES
December 31, | |||||||||
1999 | 1998 | ||||||||
ASSETS | |||||||||
Investments: | |||||||||
Loans receivable, net | $ | 115,265 | $ | 119,712 | |||||
Real estate investments, net | 70,683 | 61,774 | |||||||
Restricted investments | 9,616 | 13,290 | |||||||
Cash equivalents | 72 | 202 | |||||||
Total investments | 195,636 | 194,978 | |||||||
Other assets: | |||||||||
Cash | 156 | 23 | |||||||
Interest receivable | 603 | 786 | |||||||
Deferred borrowing costs, net | 507 | 637 | |||||||
Other assets, net | 335 | 266 | |||||||
Total other assets | 1,601 | 1,712 | |||||||
Total assets | $ | 197,237 | $ | 196,690 | |||||
LIABILITIES AND BENEFICIARIES EQUITY | |||||||||
Liabilities: | |||||||||
Notes payable | $ | 63,152 | $ | 66,852 | |||||
Revolving credit facility | 34,605 | 28,535 | |||||||
Dividends payable | 3,007 | 2,967 | |||||||
Due to affiliates | 1,023 | 1,232 | |||||||
Borrower advances | 828 | 788 | |||||||
Unearned commitment fees | 140 | 558 | |||||||
Interest payable | 366 | 494 | |||||||
Other liabilities | 2,184 | 1,827 | |||||||
Total liabilities | 105,305 | 103,253 | |||||||
Commitments and contingencies | |||||||||
Beneficiaries equity: | |||||||||
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01 par value; 6,536,896 and 6,520,037 shares issued and outstanding at December 31, 1999 and 1998, respectively | 65 | 65 | |||||||
Additional paid-in capital | 94,349 | 94,102 | |||||||
Cumulative net income | 47,312 | 37,048 | |||||||
Cumulative dividends | (49,794 | ) | (37,778 | ) | |||||
Total beneficiaries equity | 91,932 | 93,437 | |||||||
Total liabilities and beneficiaries equity | $ | 197,237 | $ | 196,690 | |||||
Net asset value per share | $ | 14.06 | $ | 14.33 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PMC COMMERCIAL TRUST AND SUBSIDIARIES
Years Ended December 31, | |||||||||||||
1999 | 1998 | 1997 | |||||||||||
Revenues: | |||||||||||||
Interest income - loans | $ | 13,269 | $ | 13,496 | $ | 12,378 | |||||||
Lease income | 7,531 | 3,314 | - | ||||||||||
Interest and dividends - other investments | 281 | 321 | 643 | ||||||||||
Other income | 919 | 2,177 | 792 | ||||||||||
Total revenues | 22,000 | 19,308 | 13,813 | ||||||||||
Expenses: | |||||||||||||
Interest | 7,023 | 4,289 | 1,726 | ||||||||||
Depreciation | 2,213 | 976 | - | ||||||||||
Advisory and servicing fees to affiliate, net | 2,173 | 1,809 | 1,449 | ||||||||||
General and administrative | 185 | 182 | 134 | ||||||||||
Legal and accounting fees | 142 | 72 | 55 | ||||||||||
Write-off of transaction costs | - | 569 | - | ||||||||||
Provision for loan losses | - | 40 | 60 | ||||||||||
Total expenses | 11,736 | 7,937 | 3,424 | ||||||||||
Net income | $ | 10,264 | $ | 11,371 | $ | 10,389 | |||||||
Basic weighted average shares outstanding | 6,530 | 6,498 | 6,242 | ||||||||||
Diluted weighted average shares outstanding | 6,539 | 6,503 | 6,252 | ||||||||||
Basic and diluted earnings per share | $ | 1.57 | $ | 1.75 | $ | 1.66 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
Common | ||||||||||||||||||||||||
Shares of | Additional | Cumulative | Equity | |||||||||||||||||||||
Beneficial | Par | Paid-in | Net | Cumulative | Beneficiaries | |||||||||||||||||||
Interest | Value | Capital | Income | Dividends | Total | |||||||||||||||||||
Balances, January 1, 1997 | 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 | |||||||||||||||||
Shares issued through exercise of stock options | 2,130 | - | 31 | - | - | 31 | ||||||||||||||||||
Shares issued through dividend reinvestment and cash purchase plan | 14,729 | - | 216 | - | - | 216 | ||||||||||||||||||
Dividends ($1.84 per share) | - | - | - | (12,016 | ) | (12,016 | ) | |||||||||||||||||
Net income | - | - | - | 10,264 | - | 10,264 | ||||||||||||||||||
Balances, December 31, 1999 | 6,536,896 | $ | 65 | $ | 94,349 | $ | 47,312 | $ | (49,794 | ) | $ | 91,932 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PMC COMMERCIAL TRUST AND SUBSIDIARIES
Years Ended December 31, | |||||||||||||||
1999 | 1998 | 1997 | |||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net income | $ | 10,264 | $ | 11,371 | $ | 10,389 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation | 2,213 | 976 | - | ||||||||||||
Accretion of discount and fees | (776 | ) | (838 | ) | (820 | ) | |||||||||
Amortization of organization and borrowing costs | 130 | 267 | 103 | ||||||||||||
Provision for loan losses | - | 40 | 60 | ||||||||||||
Commitment fees collected, net | 41 | 590 | 569 | ||||||||||||
Construction monitoring fees collected, net | 50 | 78 | (4 | ) | |||||||||||
Changes in operating assets and liabilities: | |||||||||||||||
Accrued interest receivable | 183 | (132 | ) | (39 | ) | ||||||||||
Other assets | (69 | ) | (257 | ) | 18 | ||||||||||
Interest payable | (128 | ) | 312 | (57 | ) | ||||||||||
Borrower advances | 40 | (643 | ) | (2,971 | ) | ||||||||||
Due to affiliates | (209 | ) | 888 | (281 | ) | ||||||||||
Other liabilities | 357 | 1,567 | 27 | ||||||||||||
Net cash provided by operating activities | 12,096 | 14,219 | 6,994 | ||||||||||||
Cash flows from investing activities: | |||||||||||||||
Loans funded | (17,478 | ) | (42,968 | ) | (43,129 | ) | |||||||||
Principal collected | 22,192 | 32,126 | 25,843 | ||||||||||||
Purchase of real estate | (4,196 | ) | (62,750 | ) | - | ||||||||||
Release of (investment in) restricted investments, net | 3,674 | (7,523 | ) | (3,007 | ) | ||||||||||
Net cash provided by (used in) investing activities | 4,192 | (81,115 | ) | (20,293 | ) | ||||||||||
Cash flows from financing activities: | |||||||||||||||
Proceeds from issuance of common shares | 31 | 2,132 | 5,038 | ||||||||||||
Proceeds from issuance of notes payable | 8,575 | 66,100 | - | ||||||||||||
Proceeds from revolving credit facility, net | 6,070 | 28,235 | - | ||||||||||||
Payment of principal on notes payable | (19,201 | ) | (17,669 | ) | (7,927 | ) | |||||||||
Payment of borrowing costs | (60 | ) | (624 | ) | - | ||||||||||
Payment of issuance costs | - | - | (16 | ) | |||||||||||
Payment of dividends | (11,760 | ) | (11,089 | ) | (9,744 | ) | |||||||||
Net cash provided by (used in) financing activities | (16,345 | ) | 67,085 | (12,649 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | (57 | ) | 189 | (25,948 | ) | ||||||||||
Cash and cash equivalents, beginning of period | 225 | 36 | 25,984 | ||||||||||||
Cash and cash equivalents, end of period | $ | 168 | $ | 225 | $ | 36 | |||||||||
Supplemental disclosures: | |||||||||||||||
Dividends reinvested | $ | 216 | $ | 284 | $ | 419 | |||||||||
Dividends declared, not paid | $ | 3,007 | $ | 2,967 | $ | 2,749 | |||||||||
Interest paid | $ | 7,151 | $ | 3,977 | $ | 1,687 | |||||||||
Assets purchased with assumed debt | $ | 6,926 | - | - | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 1. Summary of Significant Accounting Policies:
Business:
Use of Estimates in the Preparation of Financial Statements:
Principles of Consolidation:
During 1996, PMC Commercial Receivable Limited Partnership, a Delaware limited partnership (the 1996 Partnership), and PMC Commercial Corp., a Delaware corporation, were formed. PMC Commercial Corp. is the general partner for the 1996 Partnership. During 1998, PMC Commercial Trust, Ltd. 1998-1 (the 1998 Partnership), and PMCT Corp. 1998-1, a Delaware corporation were formed. PMCT Corp. 1998-1 is the general partner for the 1998 Partnership. In addition, during March 1999, four separate Delaware limited partnerships and related corporate general partners were formed to own four hospitality properties (the Special Purpose Entities).
Loans Receivable, net:
Deferred fee revenue is included as a reduction to 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.
F-7
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 1. Summary of Significant Accounting Policies (continued):
Real Estate Investments:
We periodically review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 to determine if circumstances exist indicating impairment in the carrying value of the investment in the hotel property or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, we will prepare a projection of the undiscounted future cash flows without interest charges of the specific hotel property and determine if the investment in the hotel property is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel property based on the difference between the sum of the expected future discounted net cash flows and the carrying amount of the asset. We do not believe that there are any current facts or circumstances indicating impairment of any of our real estate investments. Additionally, Amerihost guarantees the lease payment obligation of Amerihost Inns.
Deferred Borrowing Costs:
Income Taxes:
Interest Income:
Lease Income:
Cash and cash equivalents:
Concentration of Cash:
Reclassification:
F-8
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 2. Loans Receivable:
We primarily originate 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 our underwriting criteria.
The principal amount of loans we originated 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 we originated or purchased typically provide interest payments at fixed rates, although we 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 based on the terms of the loan.
During the years ended December 31, 1999, 1998 and 1997, we closed loans to 10, 27, and 33 corporations, partnerships or individuals for approximately $17.5 million, $43.0 million and $43.1 million and collected commitment fees of approximately $188,000, $850,000 and $754,000, respectively.
In connection with the origination of a loan, we charge 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. We had approximately $1.5 million and $1.8 million in deferred commitment fees at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, approximately 23% and 25%, respectively, of our loan portfolio consisted of loans to borrowers in Texas and approximately 10% and 9% of our loan portfolio consisted of loans to borrowers in Florida. No other state had a concentration of 10% or greater at December 31, 1999 and 1998. Our loan portfolio was approximately 97% concentrated in the lodging industry at December 31, 1999 and 1998. There can be no assurance that we will continue to experience the positive results historically achieved from these lending activities or that market conditions will enable us 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 our business. Additionally, a decline in economic conditions in Texas or Florida may adversely affect us. At December 31, 1999 and 1998 we had established a loan loss reserve of $100,000.
NOTE 3. Restricted Investments:
Restricted investments maintained pursuant to the structured financing completed in March 1996 and June 1998 include collection accounts which remit balances to the noteholders and reserve account balances held as collateral on behalf of the noteholders. The collection and reserve accounts consist of cash and liquid money market funds. Based on the repayment of principal on the underlying notes securing the obligation, we repaid PMC Commercial Receivable Limited Partnerships 1996 Notes in full during the year ended December 31, 1999. Accordingly, collection and reserve accounts were not required at December 31, 1999.
Restricted investments maintained pursuant to a sale/leaseback agreement include an escrow account and a capital expenditures account. The escrow account includes a deposit of two months base rent. The capital expenditures account consists of deposits made by Amerihost for future capital expenditures required to maintain the real estate investments. In accordance with the terms of our lease agreements, in addition to the guaranteed lease payments, we receive 2% of the monthly room revenues from our Hotel Properties. Such amounts are recorded as revenue as earned. Our lease agreement requires us to deposit the 2% received into a capital expenditures account. Funds are released from this account when capital expenditures are incurred.
F-9
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 3. Restricted Investments (continued):
Restricted investments consists of the following:
December 31, | ||||||||||
1999 | 1998 | |||||||||
(In thousands) | ||||||||||
Accounts maintained pursuant to the structured financings: | ||||||||||
PMC Commercial Trust, Ltd. 1998-1: | ||||||||||
Collection | $ | 4,446 | $ | 6,134 | ||||||
Reserve | 3,228 | 4,009 | ||||||||
PMC Commercial Receivable Limited Partnership: | ||||||||||
Collection | - | 1,421 | ||||||||
Reserve | - | 397 | ||||||||
Escrow and capital expenditures accounts | 1,841 | 1,228 | ||||||||
Other | 101 | 101 | ||||||||
$ | 9,616 | $ | 13,290 | |||||||
NOTE 4. Real Estate Investments:
Our real estate investments consist of 30 hospitality properties (the Hotel Properties) we purchased from Amerihost Properties, Inc. (Amerihost) under a sales/leaseback agreement. Pursuant to the sale/leaseback agreement, we lease the Hotel 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. We purchased 26 of the Hotel Properties during June 1998 for $62.2 million and we acquired the remaining four Hotel Properties during March 1999. The aggregate base rent payment for the Hotel Properties is $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. Amerihost guarantees the lease payment obligation of Amerihost Inns in the master lease agreement. Amerihost is a public entity that files periodic reports with the Securities and Exchange Commission. Additional information about Amerihost can be obtained from the SECs website at http://www.sec.gov.
Real estate investments consist of our investment in the acquired Hotel Properties, as follows:
December 31, | ||||||||
1999 | 1998 | |||||||
(In thousands) | ||||||||
Land | $ | 7,944 | $ | 6,900 | ||||
Buildings and improvements | 60,426 | 51,126 | ||||||
Furniture, fixtures and equipment | 5,502 | 4,724 | ||||||
73,872 | 62,750 | |||||||
Accumulated depreciation | (3,189 | ) | (976 | ) | ||||
Real estate investments, net | $ | 70,683 | $ | 61,774 | ||||
F-10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 5. Related Party Transactions:
Our loans are originated and serviced by PMC Advisers, Ltd. and it subsidiary (together, PMC Advisers) pursuant to an Investment Management Agreement (the IMA). Property acquisitions are supervised pursuant to a separate agreement with PMC Advisers entered into in June 1998 (the Lease Supervision Agreement and together with the IMA the IMAs).
Pursuant to the IMA, we are charged an annual fee between 0.40% and 1.67%, based upon the average principal outstanding of our loans. In addition, PMC Advisers earns fees for its assistance in the issuance of our debt and equity securities. The Lease Supervision Agreement provides for an annual fee of 0.70% of the original cost of the Hotel Properties to be paid to PMC Advisers for providing services relating to the leases on the Hotel Properties. In addition, the Lease Supervision Agreement provides for a fee in connection with the acquisition of properties of 0.75% of the acquisition cost. In the event the Lease Supervision Agreement with PMC Advisers is terminated or not renewed by PMC Commercial (other than as a result of a material breach by PMC Advisers) or terminated by PMC Advisers (as a result of a material breach by PMC Commercial), PMC Advisers would be entitled to receive the Lease Supervision Fee for a period of five years from the termination date.
Fees associated with the IMAs consist of the following:
Years Ended December 31, | |||||||||||||
1999 | 1998 | 1997 | |||||||||||
(In thousands) | |||||||||||||
Lease Supervision Fee | $ | 573 | $ | 218 | $ | - | |||||||
Investment Management Fee | 1,746 | 2,422 | 1,622 | ||||||||||
Total fees incurred | 2,319 | 2,640 | 1,622 | ||||||||||
Less: | |||||||||||||
Fees capitalized as cost of originating loans | (65 | ) | (198 | ) | (173 | ) | |||||||
Fees capitalized as cost of property acquisitions and structured financing | (81 | ) | (633 | ) | - | ||||||||
Advisory and servicing fees to affiliate, net | $ | 2,173 | $ | 1,809 | $ | 1,449 | |||||||
NOTE 6. Borrower Advances and Construction Lending:
We finance projects during the construction phase. At December 31, 1999 and 1998, we were in the process of funding approximately $4.1 million and $8.7 million in construction projects, respectively, of which $0.4 million and $5.3 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, we receive funds from the borrowers and release funds upon presentation of appropriate supporting documentation. At December 31, 1999 and 1998, we had approximately $828,000 and $788,000, respectively in funds held on behalf of borrowers, which is included as a liability in the accompanying consolidated balance sheets.
NOTE 7. Earnings Per Share:
The weighted average number of common shares of beneficial interest outstanding were 6,529,780, 6,497,924 and 6,242,182 for the periods ended December 31, 1999, 1998 and 1997, respectively. For purposes of calculating diluted earnings per share, the weighted average shares outstanding were increased by 9,128, 5,512; and 9,943 for the effect of stock options during the years ended December 31, 1999, 1998 and 1997, respectively.
F-11
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 8. Shareholder Distributions:
As part of the requirements of qualifying for REIT status under the Code, we must distribute to our shareholders at least 95% of our income for Federal income tax purposes (Taxable Income) within established time requirements of the Code. If these requirements are not met, we will be subject to Federal income taxes and/or excise taxes. As a result of timing differences for the recognition of income with respect to fees collected at the inception of originating loans, our Taxable Income exceeds net income in accordance with generally accepted accounting principles. In order to prevent incurring any tax liability, we have declared or distributed the required amount of taxable income as dividends to our shareholders. For Federal income tax purposes, $0.12 of our 1999 dividend was deemed to be a return of capital.
NOTE 9. Dividend Reinvestment and Cash Purchase Plan:
We have 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 closing 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. The optional cash purchase plan was suspended during January, 2000. In addition, since January 2000 we have been using the open market to purchase shares with proceeds from the dividend reinvestment portion of the plan. During the years ended December 31, 1999, 1998 and 1997, 14,729; 111,111, and 289,563 shares, respectively, were issued pursuant to the plan.
NOTE 10. Share Option Plans:
We have two stock-based compensation plans, which are described below. We apply 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 us, would have changed the methods we apply in recognizing the cost of our stock-based compensation plans. Adoption of the cost recognition provisions of SFAS No. 123 is optional and we decided not to elect these provisions of SFAS No. 123. However, pro forma disclosures as if we had adopted the cost recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are presented below.
We have 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, we are 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 392,214 shares at December 31, 1999) 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 1999, 1998, and 1997 we granted both qualified and nonqualified stock options under the Stock Option Plans to directors and non-employees.
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 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
F-12
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 10. Share Option Plans (continued):
shares exercisable under the Trust Managers Plan at December 31, 1999 and 1998 were 28,000 and 23,000, 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 1999, 1998 and 1997 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, 27,500 options fully vested in January 2000. The remainder of options granted prior to 1999 fully vested on the first anniversary date of grant and the options granted in 1999 vested immediately. We granted 50,500; 54,850, and 57,250 options during the years ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, 273,920 share options had been granted since the inception of the plan. We have not recognized compensation expense for the stock options granted in 1999, 1998 and 1997.
A summary of the status of our stock options as of December 31, 1999, 1998 and 1997 and the changes during the years ended on those dates is presented below:
1999 | 1998 | 1997 | ||||||||||||||||||||||
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 | |||||||||||||||||||
Outstanding January 1 | 143,381 | $ | 18.02 | 109,921 | $ | 17.81 | 78,529 | $ | 15.83 | |||||||||||||||
Granted | 50,500 | $ | 11.54 | 54,850 | $ | 18.00 | 57,250 | $ | 19.41 | |||||||||||||||
Exercised | (2,130 | ) | $ | 14.46 | (16,940 | ) | $ | 16.20 | (23,358 | ) | $ | 15.19 | ||||||||||||
Forfeited | (2,940 | ) | $ | 17.81 | (4,450 | ) | $ | 19.32 | (2,400 | ) | $ | 16.88 | ||||||||||||
Expired | (550 | ) | $ | 11.79 | - | $ | - | (100 | ) | $ | 11.88 | |||||||||||||
Outstanding December 31 | 188,261 | $ | 16.41 | 143,381 | $ | 18.02 | 109,921 | $ | 17.81 | |||||||||||||||
Exercisable at December 31 | 159,980 | $ | 16.62 | 78,531 | $ | 17.83 | 40,821 | $ | 15.84 | |||||||||||||||
Weighted-average fair value of options granted during the year | $ | 0.12 | $ | 0.62 | $ | 1.09 | ||||||||||||||||||
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 1999, 1998 and 1997:
Years Ended December 31, | ||||||||||||
1999 | 1998 | 1997 | ||||||||||
Assumption: | ||||||||||||
Expected Term (years): | 3.0 | 3.0 | 3.0 | |||||||||
Risk-Free Interest Rate: | 5.91 | % | 4.52 | % | 5.78 | % | ||||||
Expected Dividend Yield: | 16.05 | % | 9.00 | % | 9.00 | % | ||||||
Expected Volatility | 13.41 | % | 13.27 | % | 15.78 | % |
F-13
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 10. Share Option Plans (continued):
The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Number | Weighted | Number | ||||||||||||||||||
Range of | Outstanding | Remaining | Weighted Average | Exercisable | Weighted Average | |||||||||||||||
Exercise Prices | at 12/31/99 | Contract Life | Exercise Price | at 12/31/99 | Exercise Price | |||||||||||||||
$11.19 to $15.00 | 50,500 | 4.88 | $ | 11.54 | 29,500 | $ | 11.19 | |||||||||||||
$15.75 to $19.88 | 137,761 | 2.71 | $ | 18.21 | 130,480 | $ | 17.85 | |||||||||||||
$11.19 to $19.88 | 188,261 | 3.16 | $ | 16.41 | 159,980 | $ | 16.62 | |||||||||||||
The pro forma effects on net income and earnings per share for 1999, 1998 and 1997 from compensation expense computed pursuant to SFAS No. 123, for awards granted to directors and officers, is as follows (in thousands, except per share data):
December 31, 1999 | December 31, 1998 | December 31, 1997 | ||||||||||||||||||||||
As Reported | Pro Forma | As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||||||||
SFAS No. 123 Charge | $ | - | $ | 31 | $ | - | $ | 56 | $ | - | $ | 43 | ||||||||||||
APB No. 25 Charge | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Net Income | $ | 10,264 | $ | 10,233 | $ | 11,371 | $ | 11,315 | $ | 10,389 | $ | 10,346 | ||||||||||||
Basic Earnings Per Share | $ | 1.57 | $ | 1.57 | $ | 1.75 | $ | 1.74 | $ | 1.66 | $ | 1.66 | ||||||||||||
Diluted Earnings Per Share | $ | 1.57 | $ | 1.56 | $ | 1.75 | $ | 1.74 | $ | 1.66 | $ | 1.66 |
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
NOTE 11. Notes Payable
Revolving Credit Facility
Structured Financings
F-14
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 11. Notes Payable (continued):
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 us to the 1996 Partnership. On July 1, 1999, we redeemed all of our remaining outstanding 1996 Notes (aggregating $628,000) under the cleanup call provisions of the private placement agreement.
In June 1998, 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). In connection with this transaction, the 1998 Notes were given a rating of Aaa by Moodys Investors Service, Inc. We own, 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 that we contributed to the 1998 Partnership. At December 31, 1999, approximately $50.0 million of loan principal remained outstanding. We service, through PMC Advisers, the loans contributed to the 1998 Partnership. We have no obligation to pay the 1998 Notes nor do the holders of the 1998 Notes have any recourse against our assets. Accordingly, if the 1998 Partnership fails to pay the 1998 Notes, the sole recourse of the holders of the 1998 Notes is against the assets of the 1998 Partnership. The net proceeds from the issuance of the 1998 Notes (approximately $46.5 million after giving effect to costs of approximately $400,000, repayment of certain indebtedness related to the contributed loans of approximately $14.6 million, a $2.2 million initial reserve deposit held by the trustee as collateral and a deposit of $2.4 million representing collections or prepayments on the underlying loans due to the holders of the 1998 Notes) were distributed to us in accordance with our interest in the 1998 Partnership. The 1998 Partnerships assets consist solely of the loans acquired from us, 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, 1999 was $47.8 million. All principal collected on the underlying loans during the monthly period (as defined in the related trust indenture) are used to make the required principal payment on the first business day of the following month.
We receive distributions from the 1998 Partnership. Pursuant to the trust indenture, distributions of the net assets of our wholly-owned subsidiaries are limited. As of December 31, 1999, the dividends available for distribution from the 1998 Partnership were approximately $311,000, which was distributed to us in January 2000.
Mortgages Payable - PMC Commercial
Other Mortgages Payable
F-15
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 12. 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 judgment 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 we could realize in a current market exchange or the amount that ultimately will be realized by us upon maturity or disposition.
The estimated fair values of our financial instruments are as follows:
Years Ended December 31, | |||||||||||||||||
1999 | 1998 | ||||||||||||||||
Estimated | Estimated | ||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||
Amount | Value | Amount | Value | ||||||||||||||
Assets: | |||||||||||||||||
Loans receivable, net | $ | 115,265 | $ | 117,188 | $ | 119,712 | $ | 122,948 | |||||||||
Cash and cash equivalents | 228 | 228 | 225 | 225 | |||||||||||||
Restricted investments | 9,616 | 9,616 | 13,290 | 13,290 | |||||||||||||
Liabilities: | |||||||||||||||||
Notes payable | 63,152 | 61,500 | 66,852 | 65,526 | |||||||||||||
Revolving credit facility | 34,605 | 34,605 | 28,535 | 28,535 |
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. | |
Revolving Credit Facilty: The carrying amount is a reasonable estimation of fair value. |
NOTE 13. Quarterly Financial Data: (unaudited)
The following represents our selected quarterly financial data which, in the opinion of management, reflects adjustments (comprising only normal recurring adjustments) necessary for fair presentation.
1999
Earnings | ||||||||||||
Revenues | Net Income | Per Share | ||||||||||
First Quarter | $ | 5,289 | $ | 2,591 | $ | 0.40 | ||||||
Second Quarter | 5,646 | 2,563 | 0.39 | |||||||||
Third Quarter | 5,517 | 2,523 | 0.39 | |||||||||
Fourth Quarter | 5,548 | 2,587 | 0.39 | |||||||||
$ | 22,000 | $ | 10,264 | $ | 1.57 | |||||||
F-16
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 13. Quarterly Financial Data (continued): (unaudited)
1998
Earnings Per | ||||||||||||
Revenues | Net Income | Share | ||||||||||
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 | |||||||
NOTE 14. Business Segments:
Operating results and other financial data are presented for our principal business segments for the year ended December 31, 1999 and 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 originates loans to small business enterprises primarily in the lodging industry and (ii) the Property Division which owns hotel properties. Prior to June 30, 1998, our business activities consisted solely of the Lending Division. Our business segment data as of December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998 is as follows:
Year Ended December 31, 1999 | Year Ended December 31, 1998 | |||||||||||||||||||||||||||||
Lending | Property | Lending | Property | Unallocated | ||||||||||||||||||||||||||
Total | Division | Division | Total | Division | Division | Costs(1) | ||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Interest income - loans and other portfolio income | $ | 14,469 | $ | 14,469 | $ | - | $ | 15,994 | $ | 15,994 | $ | - | $ | - | ||||||||||||||||
Lease income | 7,531 | - | 7,531 | 3,314 | - | 3,314 | - | |||||||||||||||||||||||
Total | 22,000 | 14,469 | 7,531 | 19,308 | 15,994 | 3,314 | - | |||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||
Interest(2) | 7,023 | 4,435 | 2,588 | 4,289 | 3,222 | 1,067 | - | |||||||||||||||||||||||
Advisory and servicing fees | 2,173 | 1,681 | 492 | 1,809 | 1,591 | 218 | - | |||||||||||||||||||||||
Depreciation | 2,213 | - | 2,213 | 976 | - | 976 | - | |||||||||||||||||||||||
Other | 327 | 308 | 19 | 863 | 294 | - | 569 | |||||||||||||||||||||||
Total | 11,736 | 6,424 | 5,312 | 7,937 | 5,107 | 2,261 | 569 | |||||||||||||||||||||||
Net income | $ | 10,264 | $ | 8,045 | $ | 2,219 | $ | 11,371 | $ | 10,887 | $ | 1,053 | $ | (569 | ) | |||||||||||||||
December 31, 1999 | December 31, 1998 | |||||||||||||||||||||||||||||
Total assets | $ | 197,237 | $ | 124,567 | $ | 72,670 | $ | 196,690 | $ | 133,688 | $ | 63,002 | $ | - | ||||||||||||||||
(1) | The unallocated costs consist of the one-time charge of $569,000 relating to certain merger costs. |
(2) | We allocate interest expense based on the relative total assets of each division. |
F-17
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTE 15. 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 Companys 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.
NOTE 16. Commitments and Contingencies:
Commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. At December 31, 1999, we had approximately $7.9 million of total loan commitments and approvals outstanding to nine small business concerns predominantly in the lodging industry. Of the total loan commitments and approvals outstanding, we had approximately $239,000 of loan commitments outstanding pertaining to three partially funded construction loans and $113,000 of commitments under the SBA 504 takeout program at December 31, 1999. The weighted average interest rate on loan commitments at December 31, 1999 was 9.6%. The above commitments are made in the ordinary course of business and, in managements 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 Loan Origination Agreement included in the IMA, if we do not have funds available for our commitments, such commitments will be referred back to PMC Advisers.
In the normal course of business, we are subject to various proceedings and claims, the resolution of which will not, in managements opinion, have a material adverse effect on our financial position or results of operations.
F-18
Report of Independent Accountants on
To the Board of Trust Managers
PMC Commercial Trust:
Our audits of the consolidated financial statements referenced in our report dated February 25, 2000, appearing on page F-2 of the 1999 Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP |
Dallas, Texas
F-19
Schedule III
Cost at Prior Year End | Additions During Current Year | |||||||||||||||||||||||
Building | Furniture | Building | Furniture | |||||||||||||||||||||
and | and | and | and | |||||||||||||||||||||
Description of Property | Land | Improvements | Fixtures | Land | Improvements | Fixtures | ||||||||||||||||||
AMERIHOST HOTELS: | ||||||||||||||||||||||||
Anderson, CA | $ | 366 | $ | 1,872 | $ | 183 | $ | - | $ | 4 | $ | - | ||||||||||||
Ashland, OH | 215 | 2,626 | 186 | - | 5 | - | ||||||||||||||||||
Coopersville ,MI | 242 | 1,999 | 180 | - | 4 | - | ||||||||||||||||||
Eagles Landing, GA | 325 | 1,815 | 180 | - | 4 | - | ||||||||||||||||||
Grand Rapids-N, MI | 221 | 2,323 | 180 | - | 5 | - | ||||||||||||||||||
Grand Rapids-S, MI | 368 | 2,173 | 183 | - | 4 | - | ||||||||||||||||||
Grove City, PA | 263 | 2,480 | 183 | - | 5 | - | ||||||||||||||||||
Hudsonville, MI | 326 | 2,215 | 183 | - | 4 | - | ||||||||||||||||||
Jackson, TN | 403 | 1,936 | 183 | - | 4 | - | ||||||||||||||||||
Kimberly, WI | 241 | 1,991 | 189 | - | 4 | - | ||||||||||||||||||
LaGrange, GA | 263 | 1,679 | 177 | - | 3 | - | ||||||||||||||||||
Mansfield, OH | 293 | 1,646 | 180 | - | 9 | - | ||||||||||||||||||
McKinney, TX | 273 | 2,066 | 183 | - | 4 | - | ||||||||||||||||||
Monroe, MI | 273 | 2,060 | 189 | - | 4 | - | ||||||||||||||||||
Mosinee, WI | 140 | 1,416 | 159 | - | 3 | - | ||||||||||||||||||
Mt. Pleasant, IA | 179 | 1,851 | 189 | - | 4 | - | ||||||||||||||||||
Port Huron, MI | 263 | 2,076 | 183 | - | 4 | - | ||||||||||||||||||
Rochelle, IL | 221 | 2,017 | 183 | - | 4 | - | ||||||||||||||||||
Shippensburg, PA | 252 | 1,888 | 180 | - | 4 | - | ||||||||||||||||||
Smyrna, GA | 290 | 1,749 | 180 | - | 3 | - | ||||||||||||||||||
Storm Lake, IA | 220 | 1,716 | 183 | - | 3 | - | ||||||||||||||||||
Tupelo, MS | 236 | 1,901 | 183 | - | 4 | - | ||||||||||||||||||
Warrenton, MO | 291 | 2,143 | 189 | - | 4 | - | ||||||||||||||||||
Wooster - E, OH | 171 | 1,673 | 174 | - | 3 | - | ||||||||||||||||||
Wooster - N, OH | 263 | 1,575 | 180 | - | 7 | - | ||||||||||||||||||
Yreka, CA | 302 | 2,239 | 183 | - | 4 | - | ||||||||||||||||||
Macomb, IL | - | - | - | 194 | 2,281 | 180 | ||||||||||||||||||
Sycamore, IL | - | - | - | 250 | 2,224 | 180 | ||||||||||||||||||
Marysville, OH | - | - | - | 300 | 2,718 | 237 | ||||||||||||||||||
Plainfield, IN | - | - | - | 300 | 1,966 | 180 | ||||||||||||||||||
$ | 6,900 | $ | 51,126 | $ | 4,725 | $ | 1,044 | $ | 9,300 | $ | 777 | |||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Gross Amounts At | ||||||||||||||||
Which Carried at | ||||||||||||||||
Close of Period | ||||||||||||||||
Building | Furniture | |||||||||||||||
and | and | |||||||||||||||
Description of Property | Land | Improvements | Fixtures | Total | ||||||||||||
AMERIHOST HOTELS: | ||||||||||||||||
Anderson, CA | $ | 366 | $ | 1,876 | $ | 183 | 2,425 | |||||||||
Ashland, OH | 215 | 2,631 | 186 | 3,032 | ||||||||||||
Coopersville ,MI | 242 | 2,003 | 180 | 2,425 | ||||||||||||
Eagles Landing, GA | 325 | 1,819 | 180 | 2,324 | ||||||||||||
Grand Rapids-N, MI | 221 | 2,328 | 180 | 2,729 | ||||||||||||
Grand Rapids-S, MI | 368 | 2,177 | 183 | 2,728 | ||||||||||||
Grove City, PA | 263 | 2,485 | 183 | 2,931 | ||||||||||||
Hudsonville, MI | 326 | 2,219 | 183 | 2,728 | ||||||||||||
Jackson, TN | 403 | 1,940 | 183 | 2,526 | ||||||||||||
Kimberly, WI | 241 | 1,995 | 189 | 2,425 | ||||||||||||
LaGrange, GA | 263 | 1,682 | 177 | 2,122 | ||||||||||||
Mansfield, OH | 293 | 1,655 | 180 | 2,128 | ||||||||||||
McKinney, TX | 273 | 2,070 | 183 | 2,526 | ||||||||||||
Monroe, MI | 273 | 2,064 | 189 | 2,526 | ||||||||||||
Mosinee, WI | 140 | 1,419 | 159 | 1,718 | ||||||||||||
Mt. Pleasant, IA | 179 | 1,855 | 189 | 2,223 | ||||||||||||
Port Huron, MI | 263 | 2,080 | 183 | 2,526 | ||||||||||||
Rochelle, IL | 221 | 2,021 | 183 | 2,425 | ||||||||||||
Shippensburg, PA | 252 | 1,892 | 180 | 2,324 | ||||||||||||
Smyrna, GA | 290 | 1,753 | 180 | 2,223 | ||||||||||||
Storm Lake, IA | 220 | 1,719 | 183 | 2,122 | ||||||||||||
Tupelo, MS | 236 | 1,905 | 183 | 2,324 | ||||||||||||
Warrenton, MO | 291 | 2,147 | 189 | 2,627 | ||||||||||||
Wooster - E, OH | 171 | 1,676 | 174 | 2,021 | ||||||||||||
Wooster - N, OH | 263 | 1,582 | 180 | 2,025 | ||||||||||||
Yreka, CA | 302 | 2,243 | 183 | 2,728 | ||||||||||||
Macomb, IL | 194 | 2,281 | 180 | 2,655 | ||||||||||||
Sycamore, IL | 250 | 2,224 | 180 | 2,654 | ||||||||||||
Marysville, OH | 300 | 2,718 | 237 | 3,255 | ||||||||||||
Plainfield, IN | 300 | 1,966 | 180 | 2,446 | ||||||||||||
$ | 7,944 | $ | 60,426 | $ | 5,502 | 73,872 | ||||||||||
F-20
Schedule III
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 | |||||||||||||||
Anderson, CA | $ | 109 | $ | 2,316 | 01/19/97 | 06/30/98 | 7 - 35 years | |||||||||||||
Ashland, OH | 142 | 2,890 | 08/09/96 | 06/30/98 | 7 - 35 years | |||||||||||||||
Coopersville ,MI | 114 | 2,311 | 01/09/96 | 06/30/98 | 7 - 35 years | |||||||||||||||
Eagles Landing, GA | 106 | 2,218 | 08/08/95 | 06/30/98 | 7 - 35 years | |||||||||||||||
Grand Rapids-N, MI | 128 | 2,600 | 07/05/95 | 06/30/98 | 7 - 35 years | |||||||||||||||
Grand Rapids-S, MI | 122 | 2,607 | 06/11/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Grove City, PA | 135 | 2,796 | 04/24/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Hudsonville, MI | 124 | 2,605 | 11/24/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Jackson, TN | 112 | 2,414 | 04/01/98 | 06/30/98 | 7 - 35 years | |||||||||||||||
Kimberly, WI | 115 | 2,311 | 06/30/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
LaGrange, GA | 100 | 2,022 | 03/01/95 | 06/30/98 | 7 - 35 years | |||||||||||||||
Mansfield, OH | 99 | 2,029 | 11/19/94 | 06/30/98 | 7 - 35 years | |||||||||||||||
McKinney, TX | 118 | 2,409 | 01/06/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Monroe, MI | 118 | 2,409 | 09/19/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Mosinee, WI | 86 | 1,632 | 04/30/93 | 06/30/98 | 7 - 35 years | |||||||||||||||
Mt. Pleasant, IA | 109 | 2,115 | 07/02/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Port Huron, MI | 118 | 2,409 | 07/01/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Rochelle, IL | 116 | 2,310 | 03/07/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Shippensburg, PA | 109 | 2,215 | 08/09/96 | 06/30/98 | 7 - 35 years | |||||||||||||||
Smyrna, GA | 103 | 2,120 | 01/08/96 | 06/30/98 | 7 - 35 years | |||||||||||||||
Storm Lake, IA | 103 | 2,019 | 03/13/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Tupelo, MS | 111 | 2,213 | 07/25/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Warrenton, MO | 122 | 2,506 | 11/07/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Wooster - E, OH | 99 | 1,922 | 01/18/94 | 06/30/98 | 7 - 35 years | |||||||||||||||
Wooster - N, OH | 96 | 1,928 | 10/21/95 | 06/30/98 | 7 - 35 years | |||||||||||||||
Yreka, CA | 125 | 2,604 | 08/04/97 | 06/30/98 | 7 - 35 years | |||||||||||||||
Macomb, IL | 62 | 2,593 | 05/01/95 | 03/23/99 | 7 - 35 years | |||||||||||||||
Sycamore, IL | 61 | 2,594 | 05/31/96 | 03/23/99 | 7 - 35 years | |||||||||||||||
Marysville, OH | 76 | 3,179 | 06/01/90 | 03/05/99 | 7 - 35 years | |||||||||||||||
Plainfield, IN | 56 | 2,390 | 09/01/92 | 03/05/99 | 7 - 35 years | |||||||||||||||
$ | 3,189 | $ | 70,683 | |||||||||||||||||
F-21
Schedule III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
Gross amount carried: | ||||||||||
Totals | ||||||||||
Balance at January 1, 1999 | $ | 62,750 | ||||||||
Additions during period: | ||||||||||
Acquisitions through foreclosure | $ | - | ||||||||
Other Acquisitions | 11,111 | |||||||||
Improvements, etc. | 11 | |||||||||
Other (describe) | - | |||||||||
$ | 11,122 | |||||||||
Deductions during period: | ||||||||||
Cost of real estate sold | $ | - | ||||||||
Other (describe) | - | |||||||||
$ | - | |||||||||
Balance at December 31, 1999 | $ | 73,872 | ||||||||
Accumulated Depreciation: | ||||||||||
Balance at January 1, 1999 | $ | 976 | ||||||||
Additions during period: | ||||||||||
Depreciation expense during the period | 2,213 | |||||||||
Deductions during period: | ||||||||||
Assets sold or written-off during the period | - | |||||||||
Balance at December 31, 1999 | $ | 3,189 | ||||||||
F-22
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
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 Registrants Form 8-K dated June 5, 1998 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 | Sixth Amendment to Loan Agreement and Amendment to Loan Documents and Renewal and Extension of Loan Dated as of November 29, 1999. | |||
******21 | Subsidiaries of the Registrant | |||
******27 | Financial Data Schedule |
* | Previously filed as an exhibit to our Registration Statement on 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 our 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 our 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 our quarterly report on Form 10-Q for the quarter ended March 31, 1998. |
***** | Previously filed with the Commission as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. |
****** | Filed herewith. |
F-23
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