UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-30507
Primecore Mortgage Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland 94-3324992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 El Camino Real
Menlo Park, CA 94025
(Address of principal offices) (zip code)
(650) 328-3060
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 |_|
The number of shares of convertible preferred stock outstanding as of
September 30, 2001 was 22,135,483. The number of shares of common stock
outstanding as of September 30, 2001 was 100.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited).................................. 3
Balance Sheets as of September 30, 2001 and
December 31, 2000 (unaudited).................................. 4
Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 (unaudited)........................ 5
Statement of Shareholders' Equity for the Nine Months Ended
September 30, 2001 (unaudited)................................. 6
Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 (unaudited)........................ 7
Notes to the Financial Statements (unaudited)..................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 21
Part II. Other Information
Item 1. Legal Proceedings................................................ 22
Item 2. Changes in Securities and Use of Proceeds........................ 22
Item 3. Defaults Upon Senior Securities.................................. 22
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
Item 5. Other Information................................................ 22
Item 6. Exhibits and Reports on Form 8-K................................. 23
(a) Exhibits..................................................... 23
(b) Reports on Form 8-K.......................................... 23
Signatures....................................................... 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached are the following unaudited financial statements of Primecore
Mortgage Trust, Inc. (the "Company"):
(1) Balance Sheets as of September 30, 2001, and December 31, 2000
(unaudited)
(2) Statements of Operations for the Three and Nine Months ended
September 30, 2001 and 2000 (unaudited)
(3) Statement of Shareholders' Equity for the Nine Months ended
September 30, 2001 (unaudited)
(4) Statements of Cash Flows for the Nine Months ended September 30, 2001
and 2000 (unaudited)
(5) Notes to Financial Statements (unaudited)
The financial statements referred to above should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 2000 as filed with the Securities and Exchange Commission in our
Annual Report on Form 10-K filed March 30, 2001.
3
PRIMECORE MORTGAGE TRUST, INC.
BALANCE SHEETS
As of September 30, 2001 and December 31, 2000 (unaudited)
September 30, 2001 December 31, 2000
--------------------- --------------------
ASSETS:
Investments in real estate under development............................ $ 162,569,785 $ 174,362,219
Investments in real estate under development by affiliates.............. 40,367,362 42,050,737
Investments in real estate held for sale................................ 3,691,107 --
Cash and cash equivalents............................................... 300,000 --
Other assets, net....................................................... 55,798 132,135
--------------------- --------------------
Total assets.................................................... $ 206,984,052 $ 216,545,091
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable (including $0 and $7,622,535 to affiliates at September
30, 2001, and December 31, 2000, respectively)....................... $ 22,763,153 $ 38,787,264
Secured line of credit.................................................. 13,207,701 6,644,692
Accrued expenses and other.............................................. 388,948 723,512
Bank overdraft.......................................................... 866,610 3,086,941
Preferred stock dividends payable....................................... 2,124,306 1,901,863
Payable to affiliate.................................................... 90,505 236,972
--------------------- --------------------
Total liabilities............................................... 39,441,223 51,381,244
--------------------- --------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock: par value $0.01, 40,000,000 shares authorized;
22,135,483 and 19,946,445 shares issued and outstanding at September
30, 2001, and December 31, 2000, respectively; entitled to $10 per
share in liquidation before any distributions to common.............. 221,174,158 199,285,861
Common stock: par value $0.01, 10,000,000 shares authorized; 100
shares issued and outstanding at September 30, 2001, and December
31, 2000............................................................. 1 1
Retained deficit........................................................ (53,631,330) (34,122,015)
--------------------- --------------------
Total shareholders' equity...................................... 167,542,829 165,163,847
--------------------- --------------------
Total liabilities and shareholders' equity...................... $ 206,984,052 $ 216,545,091
===================== ====================
The accompanying notes are an integral part of these statements.
4
PRIMECORE MORTGAGE TRUST, INC.
STATEMENTS OF OPERATIONS
For the three months ended September 30, 2001 and 2000 and
For the nine months ended September 30, 2001 and 2000
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
-------------------- -------------------- -------------------- --------------------
REVENUES:
Income from completed real estate development
(including $0; $511,250; $0; and $1,509,199
from affiliates, respectively)............... $ 1,430,690 $ 2,566,717 $ 8,151,866 $ 10,228,313
Other ........................................ -- 7 81 36,391
-------------------- -------------------- -------------------- --------------------
Total revenues...................... 1,430,690 2,566,724 8,151,947 10,264,704
-------------------- -------------------- -------------------- --------------------
EXPENSES:
Management fees to an affiliate................. 2,808,680 2,903,744 8,919,897 8,145,730
General, administrative and other............... 104,651 128,953 374,362 458,001
-------------------- -------------------- -------------------- --------------------
Total expenses...................... 2,913,331 3,032,697 9,294,259 8,603,731
-------------------- -------------------- -------------------- --------------------
Net (loss) income....................... (1,482,641) (465,973) (1,142,312) 1,660,973
Preferred stock dividends............... (6,288,698) (5,355,477) (18,367,003) (15,959,911)
-------------------- -------------------- -------------------- --------------------
Net loss allocable to common............ $ (7,771,339) $ (5,821,450) $ (19,509,315) $ (14,298,938)
==================== ==================== ==================== ====================
Basic and diluted net loss per common share..... $ (77,713) $ (58,214) $ (195,093) $ (142,989)
==================== ==================== ==================== ====================
Basic and diluted weighted-average shares
outstanding..................................... 100 100 100 100
==================== ==================== ==================== ====================
The accompanying notes are an integral part of these statements.
5
PRIMECORE MORTGAGE TRUST, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2001
(unaudited)
Retained
Preferred Stock Common Stock Deficit Total
--------------- ------------ -------- -----
Shares Amount Shares Amount
------ ------ ------ ------
Shareholders' equity at
December 31, 2000................. 19,946,445 $ 199,285,861 100 $ 1 $ (34,122,015) $ 165,163,847
Sales of preferred stock............. 2,559,754 25,595,457 -- -- -- 25,595,457
Issuance of preferred stock under
dividend reinvestment plan........ 491,802 4,918,020 -- -- -- 4,918,020
Redemption of preferred stock........ (862,518) (8,625,180) -- -- -- (8,625,180)
Dividends to preferred
shareholders...................... -- -- -- -- (18,367,003) (18,367,003)
Net loss............................. -- -- -- -- (1,142,312) (1,142,312)
------------------------------------------------------------------------------------
Shareholders' equity at
September 30, 2001................ 22,135,483 $ 221,174,158 100 $ 1 $ (53,631,330) $ 167,542,829
====================================================================================
The accompanying notes are an integral part of these statements.
6
PRIMECORE MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2000
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................................... $ (1,142,312) $ 1,660,973
(Decrease) increase in accrued expenses, bank overdraft and other... (2,554,895) 2,814,705
(Decrease) increase in payable to affiliate......................... (146,467) 382,995
Decrease in other assets, net.................................. 76,337 27,041
----------------------- ------------------
Net cash provided by (used in) operating activities.......... (3,767,337) 4,885,714
----------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate under development...................... (49,814,925) (137,694,675)
Investments in real estate under development by affiliates........ (8,519,778) (23,451,437)
Return of investments in real estate under development............ 57,916,252 94,592,635
Return of investments in real estate under development by 10,203,153 24,896,242
affiliates .
Decrease in receivable from affiliate............................. -- 1,743,081
----------------------- ------------------
Net cash provided by (used in) investing activities.......... 9,784,702 (39,914,154)
----------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of preferred stock, net of offering costs..... 25,595,457 14,657,475
Redemptions of preferred stock.................................... (8,625,180) (16,614,970)
Issuance of notes payable......................................... 17,992,400 56,144,293
Additions to notes payable from reinvested interest............... 750,349 1,235,126
Repayment of notes payable........................................ (34,766,860) (16,604,991)
Borrowings on secured line of credit.............................. 6,563,009 7,645,000
Additions to loan fees............................................ -- (129,250)
Payment of preferred stock dividends.............................. (13,226,540) (11,611,456)
----------------------- ------------------
Net cash provided by (used in) financing activities.......... (5,717,365) 34,721,227
----------------------- ------------------
Net increase (decrease) in cash and cash equivalents......... 300,000 (307,213)
Beginning cash and cash equivalents....................................... -- 675,528
----------------------- ------------------
Ending cash and cash equivalents.......................................... $ 300,000 $ 368,315
======================= ==================
Cash paid for interest, net of amounts capitalized of $3,541,210 and
$2,643,127, for the nine months ended September 30, 2001, and 2000,
respectively........................................................... $ -- $ --
======================= ==================
7
PRIMECORE MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2000
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
-------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Investments in real estate under development received in exchange for
issuance of Class A Preferred Stock....................................... -- $ 150,000
Investments in real estate under development received in exchange for
Series B Notes............................................................ -- 795,000
Reinvested Preferred Stock dividends..................................... $ 4,918,020 $ 4,291,840
The accompanying notes are an integral part of these statements.
8
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
1. ORGANIZATION AND BUSINESS
Organization
Primecore Mortgage Trust, Inc., a Maryland corporation, was formed on March 18,
1999 (inception) and commenced operations effective May 1, 1999 as a real estate
investment trust (REIT). We are engaged in the business of funding and holding
short-term construction mortgage loans secured by single-family and multi-unit
residential real property, as well as land acquisition and development loans
secured by undeveloped real property, located in the greater San Francisco Bay
Area. We are managed by Primecore Funding Group, Inc., a California corporation
located in Menlo Park, California. Our manager is responsible for origination
and servicing of the construction mortgage loans we invest in, and receives a
contractually-set monthly management fee.
Capitalization
We have authorized 50,000,000 shares of capital stock with a $0.01 par value;
40,000,000 shares are designated Class A Convertible Preferred (Preferred
Stock), and 10,000,000 shares are designated as common.
At September 30, 2001, there were 100 shares of common stock outstanding, all
held by William Whitlow, Susan Fox and Michael Rider, who are employees and
officers of our manager. Ms. Fox owns all of the stock of our manager.
The 22,135,483 and 19,946,445 shares of Preferred Stock outstanding as of
September 30, 2001 and December 31, 2000, respectively, rank senior to our
common stock as to dividends and liquidation rights. The shares are convertible
into, and have voting rights equal to, the same number of shares of our common
stock. We will not pay any dividends to the holders of the common stock so long
as any Preferred Stock is outstanding.
Preferred stock dividends are paid monthly in arrears and were $0.86 per share
(based on weighted average preferred shares outstanding of 21,296,753) for the
nine months ended September 30, 2001, compared with $0.85 per share (based on
weighted average preferred shares outstanding of 18,720,296) for the nine months
ended September 30, 2000. The terms of our dividend reinvestment plan permit our
shareholders to reinvest dividends in additional shares of Preferred Stock,
currently at $10 per share.
Holders of our Preferred Stock do not have a right to redeem their shares. Our
Board of Directors, however, currently has a stock redemption policy for
shareholders who wish to sell their shares to us. The policy may be modified or
terminated at the Board's discretion at any time. Currently, we will repurchase
shares at $10.00 per share if we have cash available for distribution. Cash
available for distribution is determined at the Board of Director's sole
discretion, and is net of current expenses, anticipated expenses, dividends,
debt obligations and reserves for operating funds. We will not sell or otherwise
liquidate any portion of our mortgage loan portfolio or other assets to fund a
redemption request. We also reserve the right to limit the number and frequency
of stock redemptions by any shareholder.
On August 31, 2001 we closed a placement offering of 20,000,000 shares of
Preferred Stock through which we had issued 5,198,395 shares for net proceeds of
$51,803,278. On September 1, 2001, we began a new private placement offering of
20,000,000 shares of Preferred Stock at $10.00 per share. As of September 30,
2001, we had issued 202,421 shares in the current private placement for net
proceeds of $2,024,210. This placement was undertaken to purchase and fund
construction mortgage loans and for working capital purposes, is ongoing, and is
presently scheduled to close on December 31, 2001; however, we anticipate
extending the closing date until all shares have been sold, at which point we
may announce an additional placement.
9
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
Risk Factors
General Economic Conditions in Silicon Valley and the San Francisco Bay Area.
Properties securing repayment of the mortgage loans are located in the San
Francisco Bay Area and primarily in Silicon Valley. Since the properties secured
by the mortgage loans are located in a limited geographical region, these
mortgage loans may be subject to a greater risk of delinquency or default if the
industries concentrated there suffer adverse economic or business developments.
Other. In addition, we are subject to other significant business and financial
risks, including but not limited to liquidity, the prevailing market for
residential real estate, interest rates, dependence on our manager, timely
completion of projects, ownership of foreclosed projects, lack of borrower
diversification, and potential environmental matters relating to properties on
which we have made loans. For additional information see Risk Factors set forth
in our Form 10-K dated March 30, 2001.
Retained Deficit
We had a retained deficit as of September 30, 2001 and December 31, 2000 because
we pay dividends to the holders of our Preferred Stock based on our taxable
income, in accordance with REIT requirements. Our taxable income differs from
income measured in accordance with accounting principles generally accepted in
the United States due to timing differences in the recognition of income from
our investments in real estate. See Income Taxes in Note 2 below. These dividend
distributions are expected to be matched by GAAP measured revenues from
completed real estate projects in future periods, as described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements present the financial position
of the Company as of September 30, 2001, and December 31, 2000, and the results
of operations and cash flows of the Company for the three and nine months ended
September 30, 2001 and 2000. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the financial position and results
of operations of the Company as of September 30, 2001 and for the period then
ended.
Use of Estimates
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States using the accrual method of
accounting. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
Investments in Real Estate under Development
and Investments in Real Estate under Development by Affiliates
In accordance the accounting rules related to acquisition, development and
construction loans ("ADC"), all of our loans are classified for financial
reporting purposes as investments in real estate under development or
investments in real estate under development by affiliates (Notes 3 and 4). Such
investments include capitalized interest and are stated at the lower of cost or
net realizable value. Management conducts a review for impairment on an
investment-by-investment basis whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable. We
recognize impairment when estimated expected future cash flows (undiscounted and
10
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
without interest charges), typically from the sale of a completed property, but
which may also include other collateral pledged in repayment, is less than the
carrying amount of the investment. The estimation of expected future net cash
flows is inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economic and market conditions. If, in future
periods, there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could result in an adjustment to the
carrying amount of the investments. To the extent an impairment has occurred,
the excess of the carrying amount of the investment over its estimated fair
value, less estimated disposition costs, will be charged to income.
Investments in real estate held for sale
Investments in real estate under development for which we have taken title upon
foreclosure or been granted title by deed in lieu of foreclosure are stated at
the lower of the carrying amount of the investment at the date title is received
plus any subsequent costs advanced, or the net realizable value upon
disposition. At September 30, 2001 we did not recognize any impairment on these
investments because we believe the investment proceeds will exceed the carrying
costs plus the costs of disposition.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and other
highly liquid short-term investments with original maturities of three months or
less. We use sweep accounts in conjunction with our credit line to manage our
cash. Each night, any cash in our bank accounts is used to pay down our line of
credit. As the checks we issue clear our accounts, funds for payment are
advanced from the line of credit. At September 30, 2001, we had a bank overdraft
of $866,610 and in excess of $1,790,000 available on our line of credit.
Income from Completed Real Estate Development
Our investment objective is to make construction mortgage loans on projects we
believe are likely to ultimately sell for an amount sufficient to repay the
principal plus interest of those loans at the agreed upon rate. With the
exception of investments in real estate held for sale acquired through
foreclosure or deed in lieu of foreclosure, we do not intend to own or develop
property and do not participate in the profit realized by the borrower,
including affiliated borrowers, upon sale of the property.
We recognize income from our investments in real estate under development upon
the sale or refinancing of the completed real estate to or by a third party. We
compute income as cash received (which includes amounts funded, accrued interest
and points) less the carrying value of the investments at the date of repayment
(which includes amounts funded and capitalized interest costs).
Income Taxes
To continue to qualify as a REIT, we must currently distribute at least 90
percent of our taxable income. As a REIT, we generally will not be subject to
corporate-level federal income tax on net income we distribute currently to our
shareholders. As such, no provision for federal income taxes is included in our
financial statements. Such taxes are the responsibility of the individual
shareholders. If we fail to qualify as a REIT in any taxable year, we will be
subject to federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and may not be able to qualify as a REIT for
four subsequent taxable years. Even if we qualify for taxation as a REIT, we may
be subject to certain state and local taxes on our income and property and to
federal income and excise taxes on our undistributed taxable income.
Net income for financial reporting purposes differs from net income for tax
reporting primarily due to differences in the method of revenue recognition for
arrangements classified as loans for income tax purposes and equity-method
investments in real estate under development for financial reporting purposes.
11
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
The following table outlines the primary differences between financial reporting
income and taxable income for the nine months ended September 30, 2001 and 2000:
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
-----------------------------------------
Net (loss) income, as reported................... $ (1,142,312) $ 1,660,973
Less: Income from completed real
estate development (8,151,866) (10,228,313)
Capitalized interest........... (3,397,097) (3,079,362)
Add: Accrued interest income on
loans and related points earned.... 29,686,126 27,613,599
Other..................................... (77,893) --
-----------------------------------------
Taxable income................................... $ 16,916,958 $ 15,966,897
=========================================
Preferred stock dividends........................ $ 18,367,003 $ 15,959,911
=========================================
Net Income Per Share of Common Stock
Per share amounts for our common stock are computed using the weighted average
common shares outstanding during the period. Net income used in the calculation
is reduced by dividends owed to preferred shareholders. The diluted weighted
average common shares outstanding include the dilutive effect of stock options
and other common stock equivalents. There are currently no stock options or
other dilutive common stock equivalents, and as a result, the basic and diluted
weighted average common shares outstanding for the nine months ended September
30, 2001 and 2000, are the same and are 100 shares.
3. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT
We make loans with maturity dates generally ranging from 12 to 18 months. For
financial reporting purposes, we apply the equity method of accounting for our
investments. Investments in real estate under development represent funds
advanced in cash plus capitalized interest on debt arrangements in effect at any
particular time. Since real estate under development generates no operating
income, we do not accrue any income for financial reporting purposes until the
sale or refinancing of a property. The income that we ultimately realize is
based upon the terms of the construction mortgage loan. During the nine months
ended September 30, 2001, interest rates on loans outstanding ranged from 11
percent to 13 percent. In addition, we charged points, which were typically 4
percent of the borrowed amount during that same period.
12
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
The following table summarizes our portfolio of investments in real estate under
development at September 30, 2001:
Location Interest Maturity Commitment Carrying
- County Rates Dates Amount Amount
----------------- -------------- ---------------- -------------- --------------
Alameda 11.00-12.00% 04/01- 10/01 $ 8,595,000 $ 3,057,345
Marin 11.25-13.00% 03/01- 07/02 55,401,000 32,130,707
Monterey 11.50-12.00% 12/01- 05/02 27,160,000 11,739,998
Other 11.00-11.50% 06/01- 05/02 23,275,000 17,407,621
San Francisco 11.50-12.00% 09/01- 08/02 26,610,000 14,564,893
San Mateo 11.00-15.00% 06/01- 09/02 71,411,140 35,505,575
Santa Clara 11.25-13.00% 06/01- 08/02 76,070,000 48,163,646
-------------- --------------
$288,522,140 $162,569,785
============== ==============
Earned but unrecognized interest and points on loans outstanding at September
30, 2001 totaled $42,338,630. These amounts will be recognized as income from
completed real estate development upon the sale or refinancing of the underlying
property.
We will fund unfunded commitments on existing loans from the repayment of other
loans, borrowings on our line of credit (Note 7), issuance of short-term notes
payable or issuance of Preferred Stock. We believe we will have adequate sources
of capital to fund these commitments when and as they become due.
As of September 30, 2001, we had commitments totaling $31,935,000 on loans with
a carrying amount of $12,463,126, which have not been paid by their stated
maturity dates and which we do not intend to extend. The properties securing
these loans are currently on the market for sale or the borrower is attempting
to refinance the property. In some instances we have filed a notice of default,
which begins the foreclosure process, however we believe that there is
sufficient equity to insure full repayment in the event that the projects do not
sell or refinance before the foreclosure process has completed. Accordingly, we
have not recognized any impairments on these loans.
During the nine months ended September 30, 2001 and 2000, we capitalized
$2,760,965 and $2,312,501 respectively, of interest expense to investments in
real estate under development.
4. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT BY AFFILIATES
We have also made loans to affiliates of our manager acting as the developer.
These arrangements are accounted for in a manner identical to that described in
Note 3 above. The following table summarizes our portfolio of investments in
real estate under development by affiliates at September 30, 2001:
Location Interest Maturity Commitment Carrying
- County Rates Dates Amount Amount
----------------- -------------- ---------------- -------------- --------------
San Mateo 11.25-11.25% 10/01-12/01 $ 14,200,000 $ 7,510,850
Santa Clara 11.00-11.50% 09/01-04/02 54,750,000 32,856,512
-------------- --------------
$ 68,950,000 $ 40,367,362
============== ==============
13
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
Earned but unrecognized interest and points on loans outstanding at September
30, 2001 totaled $12,531,396. Such amounts will be recognized as income from
completed real estate development upon the sale or refinancing of the underlying
property.
During the nine months ended September 30, 2001 and 2000, we capitalized
$636,132 and $766,860 respectively, of interest expense to investments in real
estate under development by affiliates.
5. INVESTMENTS IN REAL ESTATE HELD FOR SALE
As of September 30, 2001, we had taken title on two investments in real estate
totaling $3,691,107 compared with $0 at December 31, 2000. One of the
investments is complete and ready for sale and one project is under
construction. We intend to dispose of these properties in the normal course of
business.
6. NOTES PAYABLE
We had unsecured borrowings of $22,763,153 at September 30, 2001 compared with
$38,787,264 at December 31, 2000 on notes issued to accredited investors through
private placements. These notes have varying maturities of up to one year from
the date of issuance. The notes bear interest at rates between 9 and 13 percent
with interest payable monthly in arrears. Notes issued prior to September 29,
2000 are callable at the option of the note holder subject to the same
provisions that apply to stock redemption requests. See Note 1 - Capitalization.
As of September 30, 2001 we had not received any calls for payment on these
notes. Notes issued by us after September 29, 2000 may be redeemed at our option
before their stated maturity. At September 30, 2001, none of our unsecured notes
payable was held by our officers or directors of our manager compared with
$7,622,535 at December 31, 2000.
7. LINES OF CREDIT
We have a $15,000,000 line of credit with a commercial bank. The amount borrowed
under the line of credit at September 30, 2001, was $13,207,701 compared with
$6,644,692 at December 31, 2000. Repayment is secured by our assets and is
guaranteed by our manager and another affiliate. The line of credit carries
interest at prime plus 1.25 percent (7.25 percent at September 30, 2001) and
matures in December 2001. The terms of the line of credit require, among other
provisions, that we maintain total equity of no less than $150,000,000 and a
debt to equity ratio not exceeding 1.5 to 1.0. One of the conditions for
additional advances on our line of credit requires that we maintain quarterly
net income of $500,000. Because we had a loss for the quarter ended September
30, 2001, we did not meet the condition and have requested a waiver.
8. TRANSACTIONS WITH AFFILIATES
Management Fees
A management agreement dated March 30, 1999 and amended on October 1, 2000
between us and our manager provides for a monthly fee payable in arrears equal
to 0.25 percent of the total commitment amount of the loans in our investments
in real estate under development and in our investments in real estate under
development by affiliates.
For the three months and nine months ended September 30, 2001, the portfolio
management fees earned by our manager were $2,808,680 and $8,919,897, compared
with $2,903,744 and $8,145,730 for the three months and nine months ended
September 30, 2000.
14
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
Payable to Affiliate
The $90,505 and $236,972 payable to affiliate at September 30, 2001 and December
31, 2000, respectively, represents short-term advances to us by our manager to
facilitate our cash management. Our manager charges us an interest rate of 11
percent per annum on the outstanding balance, which amounted to $4,351 and
$50,346 for the three months and nine months ended September 30, 2001 compared
with $37,976 and $53,104 for the three months and nine months ended September
30, 2000. This interest has been capitalized to investments in real estate under
development and investments in real estate under development by affiliates.
Affiliates and Significant Borrowers.
Loans assumed by, or made to, our affiliates represent a material portion of our
investment portfolio. As of September 30, 2001, loans assumed by or made to our
affiliates represented 19% of our loan commitments and 20% of the funded portion
of those commitments. As of December 31, 2000, loans assumed by or made to our
affiliates represented 17% of our loan commitments and 19% of the funded portion
of those commitments. In contrast, no unaffiliated borrower had loans exceeding
10% of our total loans outstanding as of September 30, 2001 or December 31,
2000.
Our affiliates are entities with whom we share common control through common
management. For example, Primecore Funding Group, Inc. is our affiliate
because Susan Fox owns 100% of its stock and is its sole director. She is also
an executive officer of Primecore Funding Group, Inc., as is Mr. Rider. To the
extent that Ms. Fox is the director of Primecore Funding Group, Inc. and is one
of our directors, her position in management is common to both Primecore Funding
Group, Inc. and us.
Eprime, Inc. is our affiliate and is a California corporation, incorporated
March 21, 2000. Ms. Fox is the sole shareholder and director. She is the
president and secretary, and Mr. Rider is the chief financial officer. Eprime,
Inc. does not have any employees, does not provide any services to us and does
not receive any compensation from us.
Primecore Properties, Inc. is our affiliate and is a California corporation,
incorporated in 1997. Ms. Fox is its sole shareholder and one of its directors.
Primecore Properties, Inc. is licensed by the California Department of Real
Estate as a real estate corporation. Theresa May Couture is licensed as an
individual real estate broker and is the designated broker-officer of Primecore
Properties, Inc. Primecore Properties, Inc. does not receive any compensation
from us, but does provide services to us for certain activities that require a
California real estate broker license. Those services are performed for us under
the terms of our management agreement with Primecore Funding Group, Inc. There
are currently no arrangements for us to separately compensate Primecore
Properties, Inc. for those services, although we continue to pay a management
fee to Primecore Funding Group, Inc. See "Management Fees."
99 Investors, LLC, a California Limited Liability Company, is our affiliate.
Ms. Fox is its sole member. It does not have any employees, does not perform
any services for us and does not receive any compensation or benefits from us.
99 El Camino Partners, LLC is our affiliate and a California Limited Liability
Company. Ms. Fox is the sole member. The partnership has no employees, does not
provide any services to us and does not receive any compensation or benefits
from us. 99 El Camino Partners owns the property at 99 El Camino Real, Menlo
Park, California, our principal place of business and that of our affiliates.
The following is a summary of loans assumed by our affiliates as of September
30, 2001, categorized by loan number, project name, affiliate, commitment
amount, funded amount and percentage funded. The funded balance represents the
total amount advanced towards a loan. The funded amount may differ from the loan
15
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
balance outstanding as a result of payments received from the sales of property
secured by the loan. Also, included in the funded amount are loan fees and
interest charged to the borrower, which are not reported under generally
accepted accounting principles.
Loan Project Name Affiliate Commitment Funded % Funded
Loan 2376 104 Second Street Eprime, Inc. $ 3,500,000 $ 3,197,699 91%
Loan 2447 8 Los Altos Prop.,
7 Los Altos Hills Prop. Eprime, Inc. 13,500,000 12,639,390 94%
Loan 2512 Kate and Ascension Eprime, Inc. 5,950,000 4,689,296 79%
--------------- ---------------
Total Eprime loans $22,950,000 $20,526,385 89%
=============== ===============
Loan 2330 Scotia Pines Subdivision 99 Investors, LLC $ 4,000,000 $ 1,519,281 38%
Loan 2404 7 Lots, Los Altos Nursery 99 Investors, LLC 12,800,000 11,774,124 92%
Loan 2427 Quarry Estates - Lot 13 99 Investors, LLC 5,000,000 2,852,073 57%
Loan 2428 Quarry Estates - Lot 15 99 Investors, LLC 5,000,000 3,547,103 71%
Loan 2429 Quarry Estates - Lot 16 99 Investors, LLC 5,000,000 2,416,427 48%
Loan 2455 91 Fleur Place 99 Investors, LLC 7,100,000 5,032,944 71%
Loan 2469 37 Euclid 99 Investors, LLC 7,100,000 3,749,218 53%
--------------- ---------------
Total 99 Investors loans $46,000,000 $30,891,170 67%
=============== ===============
The loans assumed by Eprime, Inc. are secured by the remaining properties in a
series of projects where Windy Hill Associates, a California corporation, was
the original borrower. In November 1999 the sole shareholder of Windy Hill
Associates started proceedings to dissolve the corporation. Before the
dissolution, Susan Fox was the president of Windy Hill Associates, and was
managing its operations to ensure that the loans were kept current. Upon notice
of dissolution of the corporation, Ms. Fox was replaced as president by the sole
shareholder, and the loans went into default. A foreclosure sale was scheduled
for March 22, 2000.
On March 22, 2000, Eprime, Inc., purchased what is currently designated as our
loan no. 2447, for the then existing loan balance of $11,321,061. A blanket,
second deed of trust lien against several parcels secured the loan. Eprime, Inc.
foreclosed on the second deed of trust and took title to all of those parcels,
subject to existing senior liens. Those parcels are encumbered by separate,
senior deeds of trust. The note purchase and assumption agreement for all of
these loans includes guarantees of repayment and the pledge of additional
security from Primecore Funding Group, Inc., 99 Investors, LLC and the Susan M.
Fox 1996 Revocable Trust dated April 26, 1996. We are relying on the pledges of
additional security in considering impairment for these loans and believe that
the value of the completed projects, together with the additional security are
sufficient to enable full repayment. A conflict of interest may exist in this
analysis because members of management, some of whom also manage the affiliates,
assist in determining impairment.
Loan no. 2330 was assumed by 99 Investors, LLC in September 1999 and is secured
by a junior deed of trust on property developed by Eprime, Inc. and 99
Investors, LLC.
Loan no. 2404 was made to 99 Investors, LLC in September 1999. Repayment is
secured by a single junior deed of trust on 7 lots in Los Altos, California. The
loan is for development of 7 single-family residences. Construction is scheduled
for completion in December 2001. The loan is current and construction is on
schedule.
16
PRIMECORE MORTGAGE TRUST, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
(unaudited)
Loan nos. 2427-29 were made to 99 Investors, LLC in March 2000. Repayment is
secured by junior deeds of trust. The developments are single-family residences
in Los Altos Hills. Construction is scheduled for completion by December 2001.
The loans are current and construction is on schedule.
Loan nos. 2455 and 2469 were made to 99 Investors, LLC in April and September
2000, respectively. Repayment is secured by junior deeds of trust. The
developments are single-family residences in Atherton, California. Construction
is scheduled for completion in July and June 2002, respectively. The loans are
current and the projects are on schedule.
Because of changes in the scope of construction and general cost increases
during development of projects, additional funds are sometimes needed to
complete a project. We will grant an additional extension of credit if our
management believes repayment of the increased extension of credit is adequately
secured. This is true of any development we invest in, whether the borrower is
affiliated or not.
9. COMMITMENTS AND CONTINGENCIES
Litigation
We are not a party to any litigation or other proceeding that we reasonably
believe will have a materially adverse affect on our financial position, results
of operation, or cash flows.
General Uninsured Losses
We require that our borrowers carry comprehensive liability, fire, and extended
coverage insurance with policy specifications, limits, and deductibles
customarily carried for similar properties. We also carry insurance to cover
losses in case a borrower's policy lapses. There are, however, certain types of
extraordinary losses that may be either uninsurable or not economically
insurable. Further, all of the investments are located in areas that are subject
to earthquake activity. Should an investment sustain damage as a result of an
earthquake, we may incur losses due to insurance deductibles, co-payments on
insured losses, or uninsured losses. Should an uninsured loss occur, we could
lose our investment in, and anticipated profits and cash flows from an
investment.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Our material financial transactions have been purchasing and holding a portfolio
of construction mortgage loans.
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q filing. We undertake no obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this registration statement or to
reflect the occurrence of unanticipated events, other than as required by law.
Overview
Subject to the direction and oversight of our Board of Directors, our day-to-day
operations are managed by our manager. We have no employees.
We began operations on May 1, 1999, concurrent with the first interim closing of
a private offering of 14,575,664 shares of our Class A Convertible Preferred
stock at $10 per share primarily in exchange for beneficial interests in trust
deeds on real property securing loans and accrued interest totaling
$145,756,640. Purchasers of our shares were primarily investors in trust deeds
managed by Primecore Funding Group, Inc. who invested in those trust deeds
before our formation and exchanged their interests for our stock at $10 per
share on a dollar for dollar basis. Since that time we have sold our Preferred
Stock through various private placements in order to raise cash to fund our
loans and for working capital purposes.
On September 1, 2001, we began a new equity private placement offering of
20,000,000 shares of Preferred Stock at $10.00 per share. This placement was
undertaken to purchase and fund additional and existing construction mortgage
loans and for working capital purposes. This placement is ongoing, and is
presently scheduled to close on December 31, 2001, however we anticipate
extending the closing date until all shares have been sold, at which point we
may announce an additional placement.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and as such, are required to distribute at least 90
percent of our taxable income annually, subject to adjustments. Our manager
expects that the cash for such distributions will be generated from our
day-to-day operations, although we may also borrow funds to make distributions.
We may experience high volatility in financial reporting net income from quarter
to quarter and year to year, primarily as a result of fluctuations in timing of
completion of our investments in real estate under development, interest rates,
and general economic conditions in the greater San Francisco Bay Area. Our
operating results will depend, in part, upon our ability to manage our interest
rate and credit risks while maintaining our REIT status.
Results of Operations
Earnings per share are computed using weighted average common shares
outstanding. Net loss allocable to common shareholders was $7,771,338 and
$19,509,315, during the three months and nine months ended September 30, 2001,
or a loss of $77,713 and $195,093 per weighted average common share, compared
with a net loss allocable to common shareholders for the three months and nine
months ended September 30, 2000 of $5,821,450 and $14,298,938, or $58,214 and
$142,989 per weighted average common share.
The loans we make are considered real estate acquisition, development and
construction ("ADC") investments for financial reporting purposes. As of
September 30, 2001, our ADC investments, including amounts loaned to affiliates,
totaled approximately $202,937,000, compared with approximately $216,413,000 at
December 31, 2000. Funding commitments on these loans totaled approximately
$355,372,000 at September 30, 2001 compared with approximately $436,383,000 at
December 31, 2000. For a discussion of these loan arrangements, see the notes to
the financial statements.
18
We realize substantially all of our revenue from repayment of loans on completed
real estate developments, comprised of interest income earned at accrual rates
ranging from 11 to 15 percent over the life of the investments and points
typically of 4 percent of the commitment amounts, less capitalized interest.
Income from completed real estate developments totaled $1,430,690 and $8,151,866
for the three months and nine months ended September 30, 2001 compared with
$2,566,717 and $10,228,313 for the three months and nine months ended September
30, 2000. Income decreased for both the three months and nine months ended
September 30, 2001 compared with the comparable periods in 2000 because the
number of investments that have sold or refinanced has decreased. For the three
months ended September 30, 2001 six investments totaling approximately
$11,600,000 paid off compared with eleven investments totaling approximately
$27,300,000 in the three months ended September 30, 2000. For the nine months
ended September 30, 2001 twenty-nine investments totaling approximately
$65,600,000 in proceeds paid off compared with fifty-four investments totaling
approximately $134,900,000 during the same period in 2000. The decrease in
payoffs is a function of the economic slowdown in the San Francisco Bay Area and
the United States as a whole. A contributing factor has been the unwillingness
of some of our borrowers to adjust pricing of their projects to reflect the
current market environment. In such cases, we have filed notices of default that
begin the foreclosure process. As a result of these actions, we expect to
receive a higher number of payoffs, and correspondingly, proportionally more
revenue in the fourth quarter then we have had in the first three quarters of
2001.
Management fees were $2,808,680 and $8,919,897 for the three months and nine
months ended September 30, 2001, compared with $2,903,744 and $8,145,730 for the
three months and nine months ended September 30, 2000. The decrease in the
management fee for the three months ended September 30, 2001 was due to the
decrease in the balance of loan commitments from the quarter ended September 30,
2000. The increase in management fees for the nine months ended September 30,
2001 over the nine months ended September 30, 2000 is attributable primarily to
the increase in the management fee rate effective January 1, 2001 from .22% per
month to .25% per month of the total loan commitment amount.
Interest cost associated with our notes payable and secured line of credit was
$958,967and $3,346,750 for the three months and nine months ended September 30,
2001, compared with $1,559,125 and $3,079,129 for the three months and nine
months ended September 30, 2000. All interest costs have been capitalized. Our
interest costs decreased in the three months ended September 30, 2001 from the
three months ended September 30, 2000 due to a decrease in the amount of our
debt and a decrease in the interest rate on our line of credit. Our interest
costs are higher for the nine months ended September 30, 2001 than the nine
months ended September 30, 2000 because the average amount of our borrowing in
for that period was higher than the corresponding period last year even though
it has been steadily decreasing throughout 2001. We expect our total borrowing
to decrease to a level between $20,000,000 and $30,000,000 from the current
$38,000,000 over the next six months.
General administrative and other expenses were $104,651 and $374,362 for the
three months and nine months ended September 30, 2001, compared with $128,953
and $458,001 for the three months and nine months ended September 30, 2000. We
have no employees, and our general and administrative and other expenses consist
primarily of professional fees. General and administrative expenses decreased
primarily due to nonrecurring costs related to becoming an SEC registrant in
2000, as well as our manager's retention of an in-house attorney at the
beginning of 2001 to perform some of the functions previously provided for us by
outside attorneys.
Liquidity and Capital Resources
Liquidity means the need for, access to and uses of cash. Our principal demands
for liquidity are cash for operations, including funds that are required to
satisfy obligations under existing loan commitments, management fees, interest
expense associated with our indebtedness, debt repayments and distributions to
shareholders. In the near term, our principal sources of liquidity are the
repayments of our real estate investments, funds received from issuance of
unsecured notes payable, our line of credit and sales of preferred stock under
the private placement that became effective September 1, 2001.
During the nine months ended September 30, 2001 we received returns of
investments in real estate under development, including those to affiliates
totaling approximately $68,119,000 compared with approximately $119,489,000 for
the same period last year. The decrease is largely due to the slowing economy
which has resulted in longer selling periods for the homes we finance. Housing
19
inventory has increased from last year as fewer buyers are in the market and, as
a result, the number of days that a house remains on the market has increased
from an average of about 22 days a year ago to about 90 days currently.
Differing market sectors have seen differing effects. We have identified three
major price points in the markets where we lend: under $2 million; $2 million to
$5 million; and over $5 million. The housing market for properties listed under
$2 million has remained strong, with well priced properties in good locations
are still selling quickly and in some instances with multiple offers.
Approximately 37% of our investments were in homes expected to sell for a price
under $2 million. The $2 million to $5 million sector has softened from a year
ago, with prices dropping an average of 5% to 10% from last year's levels and
the average number of days on the market increasing to about 90. Approximately
27% of our investments were in homes expected to sell for a price between $2
million and $5 million. The sector over $5 million has been the most
significantly affected, with prices declining in some cases by up to 30% from
last year's levels and the average number of days on the market approaching 180.
Approximately 36% of our investments were in homes expected to sell for a price
over $5 million. As of September 30, 2001 we had 12 investments comprising
proceeds due of approximately $25,290,000: $6,500,000 in the under $2 million
sector; $9,400,000 in the $2 million to $5 million sector; and $9,390, 000 in
the over $5 million sector which were complete but which had not yet sold
compared with none at September 30, 2000. We do not expect the Bay Area market
to return to the frenetic activity seen in 2000 but rather expect sales and
prices to remain at their current levels through the middle of 2002. Although it
is too early to estimate the impact the September 11 terrorist bombings will
have on the local real estate market, if any, we are monitoring the market for
any signs of a further softening.
During September 2001, we increased our commercial bank credit line from
$10,000,000 to $15,000,000 and extended it to December 2001 while we complete
negotiations for a one-year extension. Repayment is secured by our assets, is
guaranteed by our manager and another affiliate, and carries interest at prime
plus 1.25 percent (7.25 percent at September 30, 2001). Outstanding borrowings
under the line of credit as of September 30, 2001 were $13,207,701.
At September 30, 2001 we had unsecured borrowings of approximately $23,000,000
on our Series A and Series B notes compared with approximately $39,000,000 at
December 31, 2000. We issued these notes, which bear interest at rates between 9
and 13 percent with interest payable monthly in arrears, to accredited investors
through private placements. The notes have varying maturities of up to one year
from the date of issuance with approximately $11,000,000 due by December 31,
2001; $9,000,000 due by March 31, 2002; and $3,000,000 due by June 30, 2002.
Subject to demand, we will seek to extend or replace some these notes with
longer-term notes at reduced rates of interest.
Our largest continuing use of cash is the funding of our investments. For the
nine months ended September 30, 2001 we funded investments of approximately
$58,000,000 compared with approximately $161,000,000 funded for the nine months
ended September 30, 2000. During the current year we have taken steps to reduce
the amount of our funding commitments in the wake of the slowing economy and its
effects on the return of our investments. These steps have resulted in a
reduction of our funding obligation from a monthly average of approximately
$18,000,000 during the first nine months of 2000 to approximately $4,000,000
currently. The reduction in our funding obligation provides us with greater
flexibility to manage our capital structure.
During the first nine months of 2001 we had received redemption requests
totaling approximately $33,000,000. During the same period our investment
payoffs decreased, we had to meet our maturing note payable obligations which
began at approximately $39,000,000 and we had to continue to meet our investment
funding commitments. As a result we have had to extend the time period in which
we honor redemption requests. At September 30, 2001 our outstanding redemption
requests stood at approximately $38,000,000. Because of the steps we have taken
to improve our liquidity position by reducing our investment funding
commitments, and the payments we made against our Series A and B notes payable
obligations, we project making significant redemptions in the fourth quarter.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
An investment in our stock involves a high degree of risk. Among other things,
some of the principal risks are: the real estate lending business may be
adversely affected by periods of economic slowdown, which may be accompanied by
declining real estate values on properties securing repayment of loans;
construction mortgage loans involve greater risks of repayment than loans
secured by property that has already been improved since completion market
valuation of a given project can be highly speculative and subject to
unanticipated conditions; there is no public market for our securities, and
liquidity is not assured; under our business model, loan commitments will
generally exceed immediately available cash resources, and failure to obtain
repayment of loans in our portfolio, or a failure to maintain sufficient equity
would affect our ability to fund commitments; since we have no employees, if our
manager refused or became unable to continue to serve us, and a proper
replacement were not found, this would materially impact our business.
We make loans at fixed rates of interest. To the extent that prevailing market
interest rates change during the holding period, the value of our loans may be
either adversely or positively affected. When a loan matures, generally within a
12 to 18 month period, it is subject to a new interest rate, determined by us,
based upon current conditions. Since we intend to hold all loans until they are
repaid, we do not believe that changes in market interest rates have a material
impact on the value of the Company.
For further details, see the discussion under the heading "Risk Factors" in our
Annual Report on Form 10-K dated March 30, 2001.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any litigation or other proceeding that we reasonably
believe will have a materially adverse affect on our financial position, results
of operation, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) Sales of Equity Securities.
Between January 1, 2001 and September 30, 2001, we sold and issued 2,559,754
shares of our Class A Convertible Preferred stock. Purchasers of such Class A
Convertible Preferred stock paid $10 per share.
Purchasers of our Class A Convertible Preferred stock were accredited investors
as defined in Regulation D, Rule 501 (a) (4), (5) or (6) under the 1933
Securities Act. Each investor signed a subscription agreement, which included
representations that the investor had sufficient knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of investments generally, and of the investment in our stock and the investor
was able to bear the economic risk of the investment. Each investor further
acknowledged the investor understood the entire investment could be lost.
The sales of stock were exempt from the registration requirements of the
Securities Act of 1933 pursuant to Regulation D, Rule 506. Appropriate legends
were placed on each stock certificate. No underwriters were involved and no
underwriting commissions were paid in any of the transactions.
The terms of conversion of the stock have been previously reported.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits included with this Form 10-Q following the signature page, or those
incorporated by reference to other filings are:
3i.1 Articles of Incorporation of the Company are hereby incorporated herein
by reference from Exhibit 3(i) to the Company's Registration Statement
on Form 10-12G, filed on April 28, 2000
3i.2 Articles Supplementary of the Company are hereby incorporated herein by
reference from Exhibit 99.1 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.1 Bylaws, Amended March 21, 2000 are hereby incorporated herein by
reference from Exhibit 3(ii) to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.2 Bylaws, Amended March 1, 2001 are hereby incorporated herein by
reference from Exhibit 3ii.2 to the Company's Annual Report on Form
10-K, filed on March 30, 2001
4.1.1 Specimen Stock Certificate is hereby incorporated herein by reference
from Exhibit 99.2 to the Company's Registration Statement on Form
10-12G, filed on April 28, 2000
4.1.1.1 Registration Rights Agreement is hereby incorporated herein by
reference from Exhibit 4.1 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
4.1.1.2 Founder's Registration Rights Agreement is hereby incorporated herein
by reference from Exhibit 4.2 to the Company's Registration Statement
on Form 10-12G, filed on April 28, 2000
10.1.1 Management Agreement dated March 30, 1999 is hereby incorporated herein
by reference from Exhibit 10 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
10.1.2 Management Agreement dated October 1, 2000 is hereby incorporated
herein by reference from Exhibit 10.2 to the Company's Annual Report on
Form 10-K, filed on March 30, 2001
11.1 Statement regarding computation of per share earnings
(b) Reports on Form 8-K
Not Applicable.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 6, 2001 /s/ SUSAN FOX
-------------
Susan Fox, President
Dated: November 6, 2001 /s/ MICHAEL RIDER
-----------------
Michael Rider,
Chief Financial Officer
Dated: November 6, 2001 /s/ WILLIAM E. WHITLOW
----------------------
William E. Whitlow,
Chairman of the Board
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
11.1 Statement regarding computation of per share earnings
25