Form 10-Q Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number: 1-7614
------------------------------
PMCC FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3404072
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3 Expressway Plaza
Roslyn Heights, N.Y. 11577
(Address of Principal Executive Offices and Zip Code)
(516) 625-3000
(Registrant's telephone number, including area code)
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 ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of November 9, 1998: 3,750,000 shares.
<PAGE>
PMCC FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS
Page No
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Sept. 30, 1998 and 1997 3
Nine Months Ended Sept. 30, 1998 and 1997 4
Condensed Consolidated Statements of Financial Condition (Unaudited)
Sept. 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Sept. 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information 18
Signatures 19
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PMCC FINANCIAL CORP. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Sept. 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Sales of residential rehabilitation properties $8,805,765 $8,712,170
Gains on sale of mortgage loans, net 5,408,552 3,631,841
Interest earned 1,633,472 985,787
---------- ----------
15,847,789 13,329,798
---------- ----------
Expenses:
Costs of sales, residential rehabilitation properties 8,084,440 8,268,063
Compensation and benefits 3,217,256 2,112,988
Interest expense 1,743,598 865,813
Other general and administrative 1,192,740 535,681
---------- ----------
14,238,034 11,782,545
---------- ----------
Income before income tax expense 1,609,755 1,547,253
Income tax expense 660,000 8,692
--------- ----------
Net Income $949,755 $1,538,561
========= ==========
Pro forma information:
Historical income before income tax $1,547,253
Adjustment to compensation expense for contractual
Increase in officers' salary (14,000)
----------
Pro forma income before income tax expense 1,533,253
Provision for pro forma income taxes (629,000)
----------
Pro forma net income $904,253
========
Net income/pro forma net income per share of common $0.25 $0.36
===== =====
stock-basic
Net income/pro forma net income per share of common $0.25 $0.36
===== =====
stock-diluted
Weighted average number of shares and
share equivalents outstanding-basic 3,747,307 2,500,000
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,781,797 2,500,000
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMCC FINANCIAL CORP. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Sales of residential rehabilitation properties $25,564,935 $17,519,462
Gains on sale of mortgage loans, net 12,170,359 7,972,318
Interest earned 3,942,966 1,412,083
----------- -----------
41,678,260 26,903,863
----------- -----------
Expenses:
Costs of sales, residential rehabilitation properties 23,503,098 16,522,515
Compensation and benefits 7,687,956 4,790,405
Interest expense 4,117,172 1,573,591
Other general and administrative 2,861,285 1,503,088
---------- ----------
38,169,511 24,389,599
---------- ----------
Income before income tax expense 3,508,749 2,514,264
Income tax expense (1) 2,255,000 25,198
---------- ----------
Net Income $1,253,749 $2,489,066
========== ==========
Pro forma information:
Historical income before income tax 3,508,749 $2,514,264
Adjustment to compensation expense for contractual
Increase in officers' salary -- (91,000)
----------- -----------
Pro forma income before income tax expense 3,508,749 2,423,264
Provision for pro forma income taxes (1,439,000) (1,000,000)
----------- -----------
Pro forma net income $2,069,749 $1,423,264
========== ==========
Pro forma net income per share of common stock-basic
$0.59 $0.57
===== =====
Pro forma net income per share of common stock-diluted
$0.58 $0.57
===== =====
Weighted average number of shares and
share equivalents outstanding-basic 3,530,220 2,500,000
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,583,633 2,500,000
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
(1) Income tax expense for the nine months ended September 30, 1998 includes a
provision for deferred Income tax expense of $1,081,000 related to the
change in tax status of the Company's subsidiaries From S corporation's to
C corporation's.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
Sept. 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $3,331,425 $1,713,405
Receivable from sales of loans 14,989,898 35,130,857
Mortgage loans held for sale, net 64,342,194 18,609,569
Accrued interest receivable 292,408 312,772
Other receivables, net 1,356,427 398,444
Residential rehabilitation properties 15,810,550 11,584,273
Furniture & equipment, net 739,975 286,713
Prepaid expenses and other assets 464,473 391,299
---------- ----------
Total assets $101,327,350 $68,427,332
============ ===========
Liabilities and shareholders' equity Liabilities:
Notes payable-principally warehouse lines of credit $82,043,788 $59,116,509
Notes payable-shareholder -- 293,163
Due to affiliates 2,203,219 3,084,503
Accrued expenses and other liabilities 2,355,038 1,123,948
Distribution payable 537,019 --
Taxes payable 1,703,360 --
----------- ----------
Total liabilities 88,842,424 63,618,123
----------- ----------
Shareholders' equity
Common stock 37,500 6,250
Additional paid-in capital 10,846,043 711,775
Retained earnings 1,690,750 4,091,184
Less: Treasury stock (89,367) --
---------- ---------
Total shareholders' equity 12,484,926 4,809,209
---------- ---------
Total liabilities and shareholders' equity $101,327,350 $68,427,332
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months ended Sept. 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,253,749 $2,489,066
Adjustments to reconcile net income to net cash used in operating
activities:
Residential rehabilitation properties (exclusive of cash paid
directly to/by independent contractors):
Contractual fees received (2,061,837) (996,947)
Proceeds from sales of properties 25,564,935 17,519,462
Costs of properties acquired (27,729,375) (25,684,261)
Depreciation and amortization 77,194 44,183
Decrease (increase) in accrued interest receivable 20,364 (116,997)
Net increase in mortgage loans held for sale (45,732,625) (16,934,213)
Decrease (increase) in receivable from sales of loans 20,140,959 (21,265,895)
Increase in other receivables (957,983) (262,530)
Increase in prepaid expenses and other assets (73,174) (8,233)
Increase in taxes payable 1,703,360 --
(Decrease) increase in due to affiliates (881,284) 2,273,664
Increase in accrued expenses and other liabilities 1,231,090 472,714
----------- ------------
Net cash used in operating activities (27,444,627) (42,469,987)
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (530,456) (85,756)
Principal repayments of mortgage loans held for investment -- 138,052
--------- --------
Net cash (used in) provided by investing activities (530,456) 52,296
--------- ------
Cash flows from financing activities:
Distributions to S corporation shareholders, net of
distribution payable (2,134,971) (364,502)
Net proceeds from sale of common stock 9,183,325 --
Net (decrease) increase in notes payable-shareholder (293,163) 18,163
Net borrowing installment loan 243,476 --
Treasury stock purchases (89,367) --
Net increase in notes payable-warehouse lines of credit 22,683,803 42,721,049
---------- ----------
Net cash provided by financing activities 29,593,103 42,374,710
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,618,020 (42,981)
Cash and cash equivalents at beginning of period 1,713,405 409,788
--------- -------
Cash and cash equivalents at end of period $3,331,425 $366,807
========== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $3,895,446 $1,604,930
========== ==========
Income taxes $551,640 $18,761
======== =======
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sept. 30, 1998
(Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, which are, in the opinion of management necessary for a
fair presentation of the Company's financial condition as of the dates indicated
and the results of operations for the periods shown. In preparing the
accompanying condensed consolidated financial statements, management is required
to make estimates and assumptions that reflect the reported amounts of assets
and liabilities as of the date of the condensed consolidated statements of
financial condition and of income and expenses for the periods presented in the
condensed consolidated statements of operations. The results of operations for
the three and nine months ended Sept. 30, 1998 are not necessarily indicative of
the results of operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission.
These unaudited condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1997.
Certain reclassifications have been made to conform the prior period's
presentation to the current presentation.
2. Initial Public Offering
On February 18, 1998 the shareholders of Premier Mortgage Corp. ("Premier")
exchanged all of their outstanding common shares of Premier for 2.5 million
common shares of the Company. Following the exchange, the Company completed an
initial public offering of 1.25 million common shares at a price of $9 per share
from which gross proceeds of $11,250,000 and net proceeds of $9,183,000 were
received.
At the time of the share exchange, the Company agreed to make a cash
distribution to existing shareholders of $2.7 million which was equal to a
substantial portion of the Company's undistributed subchapter S corporation
earnings. As a result, at the time of the offering, shareholders' equity was
$1.7 million. Approximately $1.9 million of the distribution was paid during the
quarter ended March 31, 1998, of which $1 million was from the proceeds of the
initial public offering. The balance of the distribution will be paid in four
equal quarterly installments and is evidenced by the Company's promissory note
bearing interest at 10% per annum. The remaining undistributed subchapter S
corporation earnings were reclassified from retained earnings to additional paid
in capital.
3. Income Taxes
Prior to February 18, 1998, certain of the Company's subsidiaries had
elected to be treated as S corporations for both federal and state income tax
purposes. As a result, the income of the subsidiaries through February 18, 1998
was taxed directly to the individual shareholders. On February 18, 1998, in
conjunction with the Company's initial public offering, the S corporation
elections were terminated and the Company's subsidiaries became C corporations
for federal and state income tax purposes and, as such, became subject to
federal and state income taxes on their taxable income for the periods after
February 18, 1998. Therefore, the provision for income taxes for the nine months
ended Sept. 30, 1998 includes a provision for deferred income taxes of
$1,081,000 related to the temporary differences existing at the termination of
the S corporation elections, and pro forma net income for the nine months ended
Sept. 30, 1998 and the nine and three months ended Sept. 30, 1997 include pro
forma income taxes as if the Company had been taxed as a C corporation
throughout the periods.
4. Earnings Per Share of Common Stock
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" ("EPS"). This statement establishes standards for computing and
presenting EPS for entities with publicly held common stock and common stock
equivalents and requires reconciliation of the numerator and denominator of the
EPS calculation presented.
Basic EPS is determined by dividing pro forma net income for the period by
the weighted average number of common shares outstanding during the same period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock which would then share in the
earnings of the Company. The additional number of shares included in the
calculation of diluted EPS arising from issued stock options was 31,797shares
and 0 shares, respectively, for the three months ended Sept. 30, 1998 and 1997
and 53,413 and 0 shares, respectively, for the nine months ended Sept. 30, 1998
and 1997.
Actual earnings per share data for periods prior to February 18, 1998 have
not been presented in the accompanying unaudited condensed consolidated
statement of operations because the Company was not a public company. Actual
earnings per share data for the period February 18, 1998 to Sept. 30, 1998 has
not been presented in the accompanying unaudited condensed consolidated
statement of operations because management believes that such data would not be
meaningful given the less than full time period and the impact of the
recognition of a deferred tax liability in connection with the change in tax
status.
5. Supplemental Information
The Company's operations consist of two principal activities (a) mortgage
banking and (b) funding the purchase, rehabilitation and resale of residential
real estate. The following table sets forth-certain information concerning these
activities (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Residential rehabilitation properties $25,565 $17,519
Mortgage banking 16,113 9,385
------- -------
$41,678 $26,904
======= =======
Less: (1)
Expenses allocable to residential rehabil-
itation properties (cost of sales, interest
expense and compensation and benefits) $24,638 $16,930
Expenses allocable to mortgage banking
(all other) 13,531 7,460
------- -------
$38,170 $24,390
======= =======
Operating Profit:
Residential rehabilitation properties 927 589
Mortgage banking 2,582 1,925
------ ------
$3,509 $2,514
====== ======
Identifiable Assets (at Sept. 30, 1998 and
December 31, 1997, respectively):
Residential rehabilitation properties $15,811 $11,584
Mortgage banking 85,516 56,843
-------- -------
$101,327 $68,427
======== =======
(1) In managing its business, the Company does not allocate corporate
expenses other than interest and compensation and benefits to its various
activities.
</TABLE>
6. Common Stock
The authorized common stock of the Company consists of 1 million shares of
preferred stock, par value $.01, none of which is presently issued, and 40
million shares of common stock, par value $.01, of which 3,750,000 shares are
issued at Sept. 30, 1998. The Company holds 14,600 shares of treasury stock at
Sept. 30, 1998. Prior to the February 18, 1998 initial public offering, Premier
had 2,500 authorized shares of Class A common stock, of which 100 shares were
issued and outstanding at December 31, 1997, and 1,000 authorized shares of
Class B common stock, of which 25 shares were issued and outstanding at December
31, 1997. In conjunction with the initial public offering, both classes of
Premier's common stock were exchanged by their shareholders for shares of the
Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q may contain forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate," and other expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as the result
of new information, future events or otherwise. The following factors could
cause actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of various
segments of the economy and demographics of the Company's lending markets; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and cost of funds; (4) federal and state regulation of the Company's
mortgage banking operations; (5) competition within the mortgage banking
industry and (6) the Company's management of rapid growth and expansion.
Results of Operations
Three Months Ended Sept. 30, 1998 Compared to Three Months Ended Sept. 30,
1997
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales of residential rehabilitation properties $8,805,765 $8,712,170
Gains on sales of mortgage loans, net 5,408,552 3,631,841
Interest earned 1,633,472 985,787
------------- ----------
Total Revenue $15,847,789 $13,329,798
============= ===========
</TABLE>
Revenues from the sale of residential rehabilitation properties increased
$94,000, or 1%, to $8.8 million for the three months ended Sept. 30, 1998 from
$8.7 million for the three months ended Sept. 30, 1997. The number of
residential rehabilitation properties sold decreased to 57 for the three months
ended Sept. 30, 1998 from 58 for the three months ended Sept. 30, 1997.
Gains on sales of mortgage loans increased $1.8 million, or 49%, to $5.4
million for the three months ended Sept. 30, 1998 from $3.6 million for the
three months ended Sept. 30, 1997. This increase was primarily due to (a)
increased loan originations and loan sales from the Company's existing retail
offices, and (b) loan originations and sales by the Company's Wholesale and
B-C-D Divisions, which commenced operations in April 1997. Mortgage loan
originations were $170 million and $98.3 million for the three months ended
Sept. 30, 1998 and 1997, respectively. For the three months ended September 30,
1998, approximately 65% of the Company's mortgage originations were derived from
its retail mortgage operations and approximately 35% from its wholesale
operations. The following table summarizes the Company's mortgage originations
(in thousands):
Three Months Ended Sept. 30,
----------------------------
1998 1997
---- ----
Conventional $107,131 $55,700
FHA/VA 41,283 23,800
BCD 21,980 18,800
-------- -------
Total $170,394 $98,300
======== =======
Although there can be no assurance thereof, the Company expects mortgage
originations to increase and therefore believes its gains on sales of mortgage
loans will increase.
Interest earned increased $648,000, or 66%, to $1.6 million for the three
months ended Sept. 30, 1998 from $986,000 for the three months ended Sept. 30,
1997. This increase was primarily due to increased mortgage originations for the
three months ended Sept. 30, 1998 as compared to the three months ended Sept.
30, 1997 and an increase in the amount of B-C-D mortgage originations which
generally are held for sale longer than conventional mortgage originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cost of sales - residential rehabilitation properties $8,084,440 $8,268,063
Compensation and benefits 3,217,256 2,112,988
Interest expense 1,743,598 865,813
Other general and administrative 1,192,740 535,681
----------- -----------
Total expenses $14,238,034 $11,782,545
=========== ===========
</TABLE>
Cost of sales - residential rehabilitation properties decreased $184,000,
or 2%, to $8.1 million for the three months ended Sept. 30, 1998 from $8.3
million for the three months ended Sept. 30, 1997. This decrease was primarily
due to the decrease in the number of properties sold.
Compensation and benefits increased $1.1 million, or 52%, to $3.2 million
for the three months ended Sept. 30, 1998 from $2.1 million for the three months
ended Sept. 30, 1997. This increase was primarily due to increased sales
salaries and commission, which are based substantially on mortgage loan
originations. Total personnel increased to 154 employees at Sept. 30, 1998 from
83 at Sept. 30, 1997.
Interest expense increased $878,000, or 101%, to $1.7 million for the three
months ended Sept. 30, 1998 from $866,000 for the three months ended Sept. 30,
1997. This increase was primarily attributable to the increase in mortgage
originations funded through the Company's warehouse facility offset, in part, by
a small decrease attributable to the funding of residential rehabilitation
properties.
Other general and administrative expense increased $657,000, or 123%, to
$1.2 million for the three months ended Sept. 30, 1998 from $536,000 for the
three months ended Sept. 30, 1997. This increase was primarily due to increased
expenses incurred in connection with the growth in the operations of the Company
including rent and facilities expense, telephone and marketing.
Although there can be no assurance thereof, the Company believes that the
expected increase in mortgage origination volume and residential rehabilitation
activities will result in increased expenses.
Income before income taxes increased $63,000, or 4%, to $1.6 million for
the three months ended Sept. 30, 1998 from $1.5 million for the three months
ended Sept. 30, 1997. Net income decreased $589,000 to $950,000 for the three
months ended Sept. 30, 1998 from $1,539,000 for the three months ended Sept. 30,
1997 as a result of a provision for income tax expense of $660,000 for the three
months ended Sept. 30, 1998 compared to $9,000 for the three months ended Sept.
30, 1997 reflecting the change in tax status to a C corporation from an S
corporation. Accordingly, net income for the three months ended Sept. 30, 1998
increased $46,000, or 5%, to 950,000 compared to pro forma net income of
$904,000 for the three months ended Sept. 30, 1997.
Nine Months Ended Sept. 30, 1998 Compared to Nine Months Ended Sept. 30,
1997
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales of residential rehabilitation properties $25,564,935 $17,519,462
Gains on sales of mortgage loans, net 12,170,359 7,972,318
Interest earned 3,942,966 1,412,083
----------- -----------
Total Revenue $41,678,260 $26,903,863
=========== ===========
</TABLE>
Revenues from the sale of residential rehabilitation properties increased
$8.0 million, or 46%, to $25.6 million for the nine months ended Sept. 30, 1998
from $17.5 million for the nine months ended Sept. 30, 1997. This increase was
primarily the result of the increase in the number of residential rehabilitation
properties sold to 167 for the nine months ended Sept. 30, 1998 from 118 for the
nine months ended Sept. 30, 1997.
Gains on sales of mortgage loans increased $4.2 million, or 53%, to $12.2
million for the nine months ended Sept. 30, 1998 from $8.0 million for the nine
months ended Sept. 30, 1997. This increase was primarily due to (a) increased
loan originations and loan sales from the Company's existing retail offices, and
(b) loan originations and sales by the Company's Wholesale and B-C-D Divisions,
which commenced operations in April 1997. Mortgage loan originations were $410.5
million and $208.0 million for the nine months ended Sept. 30, 1998 and 1997,
respectively. For the nine months ended Sept. 30, 1998, approximately 56% of the
Company's mortgage originations were derived from its retail mortgage operations
and approximately 44% from its wholesale operations. The following table
summarizes the Company's mortgage originations (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Conventional $262,634 $122,400
FHA/VA 89,686 52,300
BCD 58,181 33,300
-------- --------
Total $410,501 $208,000
========= ========
</TABLE>
Although there can be no assurance thereof, the Company expects mortgage
originations to increase and therefore believes its gains on sales of mortgage
loans will increase.
Interest earned increased $2.5 million, or 179%, to $3.9 million for the
nine months ended Sept. 30, 1998 from $1.4 million for the nine months ended
Sept. 30, 1997. This increase was primarily due to increased mortgage
originations for the nine months ended Sept. 30, 1998 as compared to the nine
months ended Sept. 30, 1997 and an increase in the amount of B-C-D mortgage
originations which generally are held for sale longer than conventional mortgage
originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cost of sales - residential rehabilitation properties $23,503,098 $16,522,515
Compensation and benefits 7,687,956 4,790,405
Interest expense 4,117,172 1,573,591
Other general and administrative 2,861,285 1,503,088
----------- -----------
Total expenses $38,169,511 $24,389,599
</TABLE>
Cost of sales - residential rehabilitation properties increased $7.0
million, or 42%, to $23.5 million for the nine months ended Sept. 30, 1998 from
$16.5 million for the nine months ended Sept. 30, 1997. This increase was
primarily due to the increase in the number of properties purchased,
rehabilitated and sold.
Compensation and benefits increased $2.9 million, or 60%, to $7.7 million
for the nine months ended Sept. 30, 1998 from $4.8 million for the nine months
ended Sept. 30, 1997. This increase was primarily due to increased sales
salaries and commission, which are based substantially on mortgage loan
originations.
Interest expense increased $2.5 million, or 162%, to $4.1 million for the
nine months ended Sept. 30, 1998 from $1.6 million for the nine months ended
Sept. 30, 1997. Approximately $309,000 of this increase was attributable to the
funding of residential rehabilitation properties. The remainder of the increase
was attributable to the increase in mortgage originations funded through the
Company's warehouse facility.
Other general and administrative expense increased $1.4 million, or 90%, to
$2.9 million for the nine months ended Sept. 30, 1998 from $1.5 million for the
nine months ended Sept. 30, 1997. This increase was primarily due to increased
expenses incurred in connection with the growth in the operations of the Company
including rent and facilities expense, telephone and marketing.
Although there can be no assurance thereof, the Company believes that the
expected increase in mortgage origination volume and residential rehabilitation
activities will result in increased expenses.
Pro forma net income increased $646,000, or 45%, to $2.1 million for the
nine months ended Sept. 30, 1998 from $1.4 million for the nine months ended
Sept. 30, 1997. Net income decreased $1.2 million to $1.3 million for the nine
months ended Sept. 30, 1998 from $2.5 million for the nine months ended Sept.
30, 1997. The nine months ended Sept. 30, 1998 includes a provision for deferred
income tax expense of $1,081,000 related to the change in tax status of the
Company's subsidiaries from S corporations to C corporations.
Liquidity and Capital Resources
The Company's principal financing needs consist of funding mortgage loan
originations and residential rehabilitation properties. To meet these needs, the
Company currently relies on borrowings under warehouse lines of credit,
borrowings from affiliates and cash flow from operations. The amount of
outstanding borrowings under warehouse lines of credit at Sept. 30, 1998 was
$81.8 million. The mortgage loans and residential rehabilitation properties,
funded with the proceeds from such borrowings, secure warehouse lines of credit.
Borrowings from affiliates are secured by mortgages on the residential
rehabilitation properties for which monies were borrowed.
On August 7, 1998, the Company entered into a Senior Secured Credit
Agreement with Chase Bank of Texas, National Association and PNC Bank (the
"Warehouse Line"). The Warehouse Line provides a warehouse line of credit of
$120 million ($90 million committed at November 11, 1998) for its mortgage
originations and residential rehabilitation purchases. The Warehouse Line
combined the two existing warehouse lines of credit with the same financial
institutions and is secured by the mortgage loans and residential rehabilitation
purchases funded with the proceeds of such borrowings. The Company has also
pledged the stock of its residential rehabilitation subsidiaries as additional
collateral. Borrowings for residential rehabilitation purchases are guaranteed
by Ronald Friedman (President, Chief Executive Officer and a Director of the
Company) and Robert Friedman (Chairman of the Board of Directors, Chief
Operating Officer, Secretary and Treasurer of the Company). The interest rate
charged for borrowings under the Warehouse Line is LIBOR plus 1 1/4%-2 1/4
depending upon the collateral type. The Warehouse Line expires on August 6,
1999.
The Warehouse Lines contains certain covenants limiting indebtedness,
liens, mergers, changes in control and sales of assets and requires the Company
to maintain minimum net worth and other financial ratios. The Company expects to
be able to renew or replace the Warehouse Line when the current terms expire.
Since September 1, 1996, the Company has borrowed funds from corporations
owned by Ronald Friedman (President, Chief Executive Officer and a Director of
the Company) and Robert Friedman (Chairman of the Board of Directors, Chief
Operating Officer, Secretary and Treasurer of the Company) to provide for
funding of residential rehabilitation properties and working capital purposes.
At Sept. 30, 1998, borrowings from these affiliates totaled $2.2 million.
Interest on borrowings from affiliates is 10% per annum and certain of the
Company's residential rehabilitation properties secure the borrowings.
On February 18, 1998, the Company completed an initial public offering of
new shares of common stock at a price of $9 per share. The Company received
gross proceeds of $11,250,000 and net proceeds of approximately $9.2 million.
The proceeds from this offering were used for funding mortgage originations and
residential rehabilitation properties, working capital and an S Corporation
distribution.
Net cash used in operations for the nine months ended Sept. 30, 1998 was
$27.4 million. The Company used cash to fund the $45.7 million net increase in
mortgage loans held for sale and the $4.2 million net increase in residential
rehabilitation properties off set, in part, by the $20.1 million decrease in
receivable from sales of loans. The increases in these assets were financed by
increased borrowings under the Warehouse Facility, and the proceeds from the
initial public offering. The Company also repurchased 14,600 shares at a cost of
$89,367 pursuant to the 100,000 share repurchase program announced in August
1998.
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 ("Y2000") compliance. The Company
has contacted the vendors of its information systems and has been informed that
these systems are Y2000 compliant. The Company's existing workstations and
fileservers are substantially Y2000 compliant and those workstations that are
not Y2000 compliant will be replaced. The Company does not believe that the cost
to modify its information technology infrastructure to be material to its
financial condition or results of operations nor does the Company anticipate any
material disruption of its operations as a result of a failure by the Company to
be compliant. However, there can be no assurance that there will not be a delay
in, or increased costs associated with, the need to address Y2000 issues. The
Company also relies, directly and indirectly, on other businesses such as third
party service providers, creditors, financial institutions and governmental
entities. Even if the Company's computer systems are not materially adversely
affected by the Y2000 issue, the Company's business and operations could be
materially adversely affected by disruptions in the operations of other entities
with which the Company interacts.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and requires the reclassification of financial statements for
earlier periods provided for comparative purposes. The statement establishes
standards for reporting and display of comprehensive income and its components.
This statement requires that all items that are to be recognized as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company has determined
that the requirements of SFAS 130 will have no impact on its financial condition
or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. The statement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. As the requirements of SFAS 131 are disclosure related, its
implementation will have no impact on the Company's financial condition or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 applies to all entities and is
effective for fiscal quarters of fiscal years beginning after June 15, 1999.
This statement establishes accounting and auditing standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company is
currently evaluating the impact SFAS No. 133 may have on its financial
statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This statement changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. Under current
practice, a firm that securitizes has a choice in how it classifies any retained
securities based on its intent and ability to hold or sell those investments.
SFAS No. 134 gives mortgage banking firms the opportunity to apply the same
intent-based accounting that is applied by other companies. SFAS No. 134 is
effective for the fiscal quarter beginning after December 15, 1998. Management
of the Company anticipates that the implementation of SFAS No. 134 will not have
a material impact on the Company's financial condition or results of operations.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant is a defendant in certain litigation arising in the normal
course of its business. In the opinion of the Registrant, any potential
liability with respect to such legal actions will not, individually or in the
aggregate, be material to the Registrant's financial position, liquidity or
future results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
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.
PMCC FINANCIAL CORP.
(Registrant)
By /s/ Ronald Friedman
-------------------
Ronald Friedman
President and Chief Executive Officer
By /s/ Timothy J. Mayette
----------------------
Timothy J. Mayette
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 12, 1998
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