<PAGE>
Filed Pursuant To Rule 424(b)(1)
Registration No. 333-38783
PROSPECTUS
[GRAPHIC OMITTED]
1,250,000 Shares of Common Stock
PMCC Financial Corp. (the "Company") hereby offers (the "Offering")
1,250,000 shares (the "Shares") of its common stock, par value $.01 per share
(the "Common Stock").
An aggregate of $1.0 million of the net proceeds of this Offering will be
paid to satisfy approximate tax liabilities associated with S Corporation
earnings to the Existing Stockholders (as defined herein). The Existing
Stockholders are affiliates of the Company. See "Reorganization and Termination
of S Corporation Status," "Use of Proceeds" and "Certain Transactions."
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that such a market will develop, or if
developed, that it will be sustained. The Common Stock will be listed on the
American Stock Exchange ("AMEX") upon official notice of issuance under the
symbol "PFC." See "Underwriting" for the factors considered in determining the
initial public offering price of the Shares.
Investors purchasing the Shares will incur immediate and substantial
dilution of $6.03 per share in net tangible book value based on an initial
offering price of $9.00 per share. See "Dilution."
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" commencing on page 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
==============================================================================
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)(3)
- --------------------------------------------------------------------------------
Per Share ......... $ 9.00 $ 0.72 $ 8.28
- --------------------------------------------------------------------------------
Total (3) ......... $11,250,000 $900,000 $10,350,000
==============================================================================
(1) Does not include additional consideration to be received by Coleman and
Company Securities, Inc. and ISG Capital Markets, LLC as the
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), including (i) a non-accountable expense allowance, (ii)
warrants to purchase an aggregate of 125,000 shares of Common Stock (the
"Representatives' Warrants") and (iii) a two year financial advisory
agreement. In addition, the Company has agreed to indemnify the
Underwriters against certain civil liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $887,500
($938,125 if the Underwriters' Over-Allotment Option is exercised in
full). See "Underwriting."
(3) The Company has granted to the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
187,500 shares of Common Stock on the same terms and conditions as set
forth above solely to cover over-allotments, if any. If the Underwriters'
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will
be $12,937,500, $1,035,000 and $11,902,500, respectively. See
"Underwriting."
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to, and accepted by, them, and subject to
their right to reject orders in whole or in part and to certain other
conditions. It is expected that delivery of certificates representing the
Shares will be made at the offices of Coleman and Company Securities, Inc. in
New York, New York, on or about February 23, 1998.
COLEMAN AND COMPANY ISG CAPITAL MARKETS, LLC
SECURITIES, INC.
February 17, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION THEREIN
MAINTAIN BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its stockholders annual reports, which
will include financial statements audited by independent accountants, and such
other periodic reports as it may determine to furnish or as may be required by
law, including Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated herein, the information in this
Prospectus does not give effect to (i) the Representatives' Warrants or the
exercise thereof; (ii) the Underwriters' over-allotment option or the exercise
thereof; (iii) up to 375,000 shares of Common Stock reserved for issuance upon
the exercise of options which may be granted pursuant to the Company's 1997
Stock Option Plan (the "1997 Plan"), none of which have been granted to date;
and (iv) 375,000 shares of Common Stock reserved for issuance upon the exercise
of options granted under the Company's Premier Option Plan (the "Premier
Plan"). Except as otherwise indicated, the information herein reflects the
consummation of the Exchange (as hereinafter defined). As used herein, the term
"year" or "fiscal year" refers to the Company's fiscal year ending December 31.
As used herein, the term "Company" refers to PMCC Financial Corp., a Delaware
corporation, its wholly-owned subsidiary, Premier Mortgage Corp., a New Jersey
corporation ("Premier"), the subsidiaries of Premier and the predecessors of
the foregoing.
This Prospectus contains certain forward-looking statements that involve
certain risks and uncertainties. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors."
The Company
PMCC Financial Corp. is a specialty consumer financial services company
providing a broad array of residential mortgage products to customers ranging
from prime credit borrowers seeking "conventional" or FHA/VA loans, to persons
who cannot so qualify, i.e., so-called "B," "C" and "D" or "sub-prime" credit
borrowers, seeking "non-conventional" loans. Since mid-1996, the Company has
expanded and diversified its mortgage banking activities by opening a
fully-staffed wholesale division, significantly increasing its "B," "C" and "D"
mortgage originations and establishing a program to provide short-term funding
to independent real estate agencies for one-to-four family residential
rehabilitated properties.
The Company's primary mortgage banking business objectives are to continue
to offer a full range of mortgage products to all types of borrowers and to
generate positive cash flow by selling substantially all originated loans for
cash to institutional investors, usually without recourse, within a short
period after such loans are originated, thereby reducing exposure to interest
rate and credit risks. For the year ended December 31, 1996 and for the nine
months ended September 30, 1997, the Company has had less than $50,000 of
credit losses in each period from its mortgage banking activities.
The Company has experienced significant growth in its mortgage banking
activities in recent years, originating $47 million in mortgage loans in 1994,
$71 million in mortgage loans in 1995, $133 million in mortgage loans in 1996
and $208 million in mortgage loans in the nine months ended September 30, 1997.
For the nine months ended September 30, 1997, sub-prime loans originated by the
Company accounted for 16% of its total mortgage originations. For its fiscal
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1997, the Company had revenues from its mortgage banking activities of $3.4
million, $6.8 million and $10.1 million, respectively. There can be no
assurance that the Company's historical rate of growth from its mortgage
banking activities will continue in future periods.
The Company originates residential first mortgages in New York and New
Jersey by a staff of 31 experienced retail loan officers (as of September 30,
1997) who obtain customers through referrals from local real estate agents,
builders, accountants, financial planners and attorneys, as well as from direct
customer contact via advertising, direct mail and promotional materials. The
Company's wholesale division originates mortgage loans through independent
mortgage bankers and brokers, who submit applications to the Company on behalf
of a borrower. For the nine months ended September 30, 1997, approximately 67%
of the Company's mortgage originations were derived from its retail mortgage
operations and approximately 33% from its wholesale operations.
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The Company's revenues from mortgage banking activities are primarily
generated from the premiums it receives on the sale of mortgage loans it
originates, and from interest earned during the period the Company holds
mortgage loans for sale. The Company's mortgage loans, together with servicing
rights to these mortgages, are sold usually on a non-recourse basis to
institutional investors, in each case within approximately seven to 30 days of
the date of origination of the mortgage. In general, when the Company
establishes an interest rate at the origination of a mortgage loan, it attempts
to contemporaneously lock in an interest yield to the institutional investor
purchasing that loan from the Company. By selling these mortgage loans shortly
after origination, the Company limits its exposure to interest rate
fluctuations and credit risks. Furthermore, by selling its mortgage loans on a
"servicing-released" basis, the Company avoids the administrative and
collection expenses of managing and servicing a loan portfolio and it avoids a
risk of loss of anticipated future servicing revenue due to mortgage
prepayments in a declining interest rate environment.
The Company also generates income by charging fees for short-term funding
to independent real estate agencies for the purchase, rehabilitation and resale
of vacant one-to-four family residences in New York City and Long Island, New
York. The Company provides this funding to several independent real estate
agencies who specialize in the rehabilitation and marketing of these
properties. As security for providing the independent real estate agencies with
the funding to accomplish the purchase, rehabilitation and resale of the
property, title to the properties is held by the Company. The Company's income
from this activity is limited to the fees and interest charged in connection
with providing the funding and is not related to any gain or loss on the sale
of the property. Because the Company holds the title to these properties, for
financial reporting purposes the Company records as revenue the gross sales
price of these properties when the properties are sold to the ultimate
purchasers and it records cost of sales equal to the difference between such
gross sales price and the amount of its contracted income pursuant to its
contracts with the independent real estate agents. From the commencement of
this activity on September 1, 1996 through December 31, 1996, the Company
completed 35 transactions and recorded revenues of $5.1 million and cost of
sales of $4.8 million. During the nine months ended September 30, 1997, the
Company completed 118 such transactions and at September 30, 1997, the Company
had 140 properties in various stages of rehabilitation and awaiting resale. The
Company's revenues and costs of sales from this activity for the nine months
ended September 30, 1997 were $17.5 million and $16.5 million, respectively.
Although the Company expects to continue this activity in its markets, there
can be no assurance that the Company's historical rate of growth of this
activity will continue in future periods. (See "Risk Factors -- Potential
Losses Incurred From the Funding of the Purchase, Rehabilitation and Resale of
Residential Real Estate"; and "Possible Fluctuations in Quarterly
Performance").
The growth of the Company's mortgage lending to "B," "C" and "D" credit
borrowers reflects the establishment, in April 1997, of the Company's sub-prime
lending division with experienced personnel, increased customer demand for
sub-prime mortgage products and the availability of capital to the Company for
these mortgage banking products. In most cases, "B," "C" and "D" credit
borrowers have substantial equity in their residences, and, while some of these
sub-prime customers have impaired credit, such customers also include
individuals who seek an expedited mortgage process and persons who are self-
employed or, due to other circumstances, have difficulty verifying their
income. The Company believes that the demand for loans by "B," "C" and "D"
credit customers is less dependent on general levels of interest rates or home
sales and therefore less cyclical than conventional mortgage lending. The
Company's sub-prime mortgage lending activity is subject to certain risks,
including risks related to the significant growth in the number of sub-prime
lenders in recent years, risks related to certain potential competition (see
"Risk Factors -- Competition"), and risks related to credit impaired borrowers
(see "Risk Factors -- Mortgage Lending to Sub-Prime Borrowers").
The Company's growth strategy includes the following elements which are
subject to risk factors, as set forth in "Risk Factors," beginning on page 7:
o increase the Company's "B," "C" and "D" mortgage originations through
recruitment of experienced salespersons and acquisition of mortgage
brokers or mortgage banks in the Northeast that specialize in mortgage
products for this target market;
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o increase the Company's wholesale mortgage origination business in New
York and expand into other states;
o expand the Company's retail mortgage origination business into
Connecticut, Pennsylvania, Florida and Maryland;
o expand the Company's residential, rehabilitation, activities in
conjunction with independent real estate agencies outside of New York City
and Long Island, New York; and
o recruit additional key personnel.
Reorganization & Termination of S Corporation Status
Premier was incorporated in New Jersey in 1989. From 1992 through the date
of this Prospectus, Premier was treated as an S corporation for federal and
certain state corporate income tax purposes. Premier received its mortgage
banking licenses in New Jersey in 1991 and in New York in 1994. The Company,
which was incorporated in Delaware in October 1997, has not yet been
capitalized. Prior to the commencement of this Offering, the stockholders of
Premier (the "Existing Stockholders") will exchange all of their outstanding
shares of Premier for an aggregate 2,500,000 shares of Common Stock (the
"Exchange"). As a result of the Exchange, the Company and Premier, which will
become a wholly-owned subsidiary of the Company, will be fully subject to
federal and state income taxes. See "Reorganization and Termination of S
Corporation Status."
The Company's principal executive office is located at 66 Powerhouse Road,
Roslyn Heights, New York 11577 and its telephone number is (516) 625-3000.
Risk Factors
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus, and, in
particular, should evaluate the factors set forth in "Risk Factors", beginning
on page 7.
The Offering
Common Stock offered by the
Company........................ 1,250,000 shares
Common Stock outstanding
prior to the Offering......... 2,500,000 shares
Common Stock to be outstanding
after the Offering............. 3,750,000 shares
Use of Proceeds................. Geographic expansion of mortgage banking
operations in the Northeast/mid-Atlantic
region and Florida; expansion of
residential rehabilitation activities in
conjunction with independent real estate
agencies; upgrade of information systems;
Subchapter S corporation distributions to
pay shareholder taxes; repayment of debt;
and general corporate and working capital
purposes.
AMEX Symbol..................... "PFC"
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Summary Consolidated Financial Information
($ in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of Operations Data: ---------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Revenue .................................... $1,076 $1,464 $1,187 $3,400 $ 11,943
Net income ................................. 231 303 62 196 1,034
Provision for pro forma income
taxes (1) ................................ 391
Pro forma net income ....................... 517
Pro forma net income per share (2) ......... $ 0.20
Pro forma weighted average number of
common shares and share equiva-
lents outstanding ........................ 2,611,111
<CAPTION>
Nine Months
Ended September 30,
Statement of Operations Data: ------------------------
1996 1997
--------- -------------
<S> <C> <C>
Revenue .................................... $5,864 $ 27,573
Net income ................................. 770 2,489
Provision for pro forma income
taxes (1) ................................ 1,000
Pro forma net income ....................... 1,423
Pro forma net income per share (2) ......... $ 0.53
Pro forma weighted average number of
common shares and share equiva-
lents outstanding ........................ 2,694,751
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
Operating Data: ------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage loans originated
Conventional (prime credit) (3) ....................... $46,700 $51,300 $ 75,400 $54,900 $122,400
FHA/VA ................................................ -- 19,400 57,700 41,800 52,300
Sub-Prime (B, C, D credit) (3) ........................ -- -- -- -- 33,300
------- ------- -------- ------- --------
Total dollar amount of loans originated ............... $46,700 $70,700 $133,100 $96,700 $208,000
======= ======= ======== ======= ========
Total number of loans originated ...................... 273 470 890 636 1,430
Average principal balance per loan originated ......... $ 171 $ 150 $ 150 $ 152 $ 145
</TABLE>
<TABLE>
<CAPTION>
At December 31,
Balance Sheet Data: -----------------------------------------------
1992 1993 1994 1995 1996
------ ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Receivable from sales of loans ................... -- -- -- $1,357 $ 9,838
Mortgage loans held for sale, net ................ -- $ 32 $ 582 5,537 2,875
Residential rehabilitation properties being
financed ........................................ -- -- -- -- 3,246
Total assets ..................................... $473 574 1,098 8,232 17,153
Borrowings under Warehouse Facility .............. -- -- 557 6,476 13,923
Amount due to affiliates and shareholder ......... -- 9 8 465 1,037
Total liabilities ................................ 68 69 633 7,117 15,258
Shareholders' equity ............................. 405 505 465 1,114 1,878
<CAPTION>
At September 30, 1997
Balance Sheet Data: ---------------------------------
Pro
Forma
Pro as
Forma Adjusted
Actual (1) (1)(4)
---------- ---------- ---------
<S> <C> <C> <C>
Receivable from sales of loans ................... $31,104 $31,104 $31,104
Mortgage loans held for sale, net ................ 19,809 19,809 19,809
Residential rehabilitation properties being
financed ........................................ 12,408 12,408 12,408
Total assets ..................................... 64,819 64,819 73,269
Borrowings under Warehouse Facility .............. 55,881 55,881 55,881
Amount due to affiliates and shareholder ......... 3,328 3,328 3,328
Total liabilities ................................ 60,761 63,119 62,119
Shareholders' equity ............................. 4,058 1,700 11,150
</TABLE>
- -------------
(1) Prior to the Exchange, Premier was treated as an S corporation for federal
and state income tax purposes. See "Reorganization and Termination of S
Corporation Status." The pro forma presentation for statement of
operations data reflects the provision for income taxes as if Premier had
always been a C corporation at assumed effective tax rates of
approximately 42%. The pro forma statement of operations data also
reflects an increase in officer compensation expense pursuant to proposed
employment contracts. The pro forma presentation for balance sheet data
reflects the deferred tax liability and the distribution payable to be
recorded as of the date of the termination of the S corporation status.
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of common shares and share
equivalents outstanding including the estimated number of shares that
would be necessary to fund a $1 million S Corporation distribution.
(3) For the years ended December 31, 1994, 1995 and 1996, the Company estimates
that the sub-prime loans accounted for less than 5% of the Company's total
originations for those years and are included in conventional loans for
those years.
(4) Adjusted to give effect to the sale by the Company of the Shares at the
initial public offering price of $9.00 per share.
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RISK FACTORS
An investment in the Shares offered hereby is speculative and involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors relating to the business of the Company and this
Offering, together with the information and financial data set forth elsewhere
in this Prospectus, before investing in the Shares. Prospective investors
should note that this Prospectus contains certain "forward-looking statements,"
statements containing the words "believes," "anticipates," "expects,"
"intends," "should," "seeks" and similar words. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those in the forward-looking statements as a result of various
factors, including, but not limited to, the risk factors set forth in this
Prospectus. The accompanying information contained in this Prospectus
identifies certain important factors that could cause such differences.
Voting Control by Majority Stockholders; Potential Conflicts of Interest
Following the consummation of this Offering, Ronald Friedman and his
father, Robert Friedman together will beneficially own 2,500,000 shares of
Common Stock which will represent approximately 67% of the total number of
shares of Common Stock outstanding (approximately 63.5% of the total number of
shares of Common Stock outstanding if the over-allotment option is exercised in
full). All of the currently outstanding shares of Common Stock are beneficially
owned or otherwise controlled by Ronald Friedman and Robert Friedman. Effective
upon the consummation of this Offering, Ronald Friedman and Robert Friedman
will enter into a stockholders agreement (the "Stockholders Agreement"), which
will contain provisions relating to the transfer and voting of their shares of
Common Stock. As a result of such Stockholders Agreement and stock ownership,
such individuals will have effective control of the Company and will continue
to have the power to control the election of all of the members of the
Company's Board of Directors and to direct the Company's management and
policies. Such persons will be able to control all stockholder decisions on
matters, which include the amendment of certain provisions of the Company's
Certificate of Incorporation and By-Laws and the approval of fundamental
corporate transactions. See "Principal Stockholders," "Description of
Securities -- Common Stock" and "Certain Transactions."
Limited History of Operations and Rapid Growth
The Company commenced mortgage lending operations in March 1991 and, since
1994, has experienced substantial growth in mortgage loan originations and
revenues from residential rehabilitation funding activities. For the years
ended December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997, mortgage loan originations were approximately $47 million, $71 million,
$133 million and $208 million, respectively. Total revenues for these periods
from mortgage banking activities were approximately $1.2 million, $3.4 million,
$6.8 million and $10.1 million, respectively. In April 1997, the Company
commenced its lending operations to sub-prime borrowers. In September 1996, the
Company commenced its residential rehabilitation activities. The revenues from
this activity were $5.1 million and $17.5 million for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively.
Accordingly, prospective investors have only a limited operating history by
which to judge the Company and its future prospects. The future prospects of
the Company must also be considered in light of the problems, expenses,
difficulties, risks and complications frequently encountered in connection with
similarly situated companies. In addition, the Company's future plans are
subject to known and unknown risks and uncertainties that may cause the
Company's actual results in future periods to be materially different from any
future performance suggested herein. There can be no assurance that future
revenues of the Company will increase or that the Company will continue to be
profitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Inability of the Company to Implement Its Growth Strategy
The Company has grown significantly since it commenced operations in 1991.
In the fourth quarter of 1994, the Company became licensed in, and opened its
office in, New York. In addition, since April 1997, the Company has
significantly increased originations of "B," "C" and "D" mortgage loans. Prior
to April 1997, the Company did not originate significant amounts of "B," "C,"
and "D" mortgage loans. Since September 1996, the
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Company has significantly increased its residential rehabilitation funding
activities. No assurance can be given that the Company can maintain its
historical rate of growth. The Company's growth strategy for the foreseeable
future is based primarily upon the expansion of the business of its "B," "C"
and "D" credit division and wholesale loan division, expansion of its
residential rehabilitation activities, and expansion of its business into new
markets. There can be no assurance that the Company will achieve its expansion
in a timely and cost-effective manner or, if achieved, that the expansion will
result in profitable operations. The failure of the Company to implement its
planned geographic expansion may have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
The Company's growth strategy, whether or not successful, is expected to
place a significant strain on its limited managerial, operational and financial
resources. The Company intends to expand its operational and financial systems
and attract and retain experienced personnel. The Company faces competition for
such personnel from other financial institutions and more established
organizations, many of which have significantly larger operations and greater
financial, marketing, human and other resources than the Company. There can be
no assurance that the Company will be successful in attracting and retaining
qualified personnel on a timely basis, on competitive terms, or at all. In the
event that the Company is not successful in attracting and retaining such
personnel, the Company's business, prospects, financial condition and results
of operations may be materially adversely affected. The failure to manage
growth effectively and to integrate new executives and other skilled personnel
may adversely affect the Company's business, prospects, financial condition and
results of operations. See "Risk Factors -- Dependence upon Management" and
"Business -- Business Strategy."
Potential Losses Incurred from the Funding of the Purchase, Rehabilitation
and Resale of Residential Real Estate
In September 1996, the Company commenced a program to provide short-term
funding to several independent real estate agencies with specialized expertise
in the acquisition, rehabilitation and resale of vacant one-to-four family
residential properties in New York City and Long Island, New York. The
Company's income from this activity is limited to fees and interest charged in
connection with providing the funding and is not related to any gain or loss on
the sale of the property. The Company's activity commences when the agencies
submit information about a property to the Company which the agencies believe
meets the Company's criteria. If the Company agrees, it will fund the property
at up to 70% of the appraised value. The Company does not generally fund
properties when the purchase price of the property is greater than 70% of the
appraised value. Although the terms of the agreements with each of the real
estate agents provide that all risks relating to the ownership, marketing and
resale of the property are borne by the real estate agents, the Company may
incur losses from this activity as the result of economic conditions or failure
of the real estate agents to fulfill their contractual obligations. Although
the real estate agents and their principals personally guarantee the
reimbursement of all costs and fees payable to the Company, including all costs
incurred by the Company in connection with the purchase of such properties,
there can be no assurance that the Company will not incur losses related to
this activity as the result of economic conditions or the failure of the real
estate agents to perform. As a result of currently or formerly holding title to
properties pursuant to its residential rehabilitation activities, various
federal, state and local environmental laws may require the Company to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties and may impose liability on the Company to a government entity
or to a third party for property damage, personal injury and investigation and
clean up costs. See "Risk Factors -- Possible Environmental Liabilities."
Dependence on Warehouse Financing Sources
The Company has funded substantially all of its mortgage banking and
residential rehabilitation activities through a collateralized borrowing
agreement (the "Borrowing Agreement") and a short-term mortgage purchase
agreement (the "Gestation Agreement," together with the Borrowing Agreement,
the "Warehouse Facility."). Its ability to continue to originate mortgage loans
and conduct residential rehabilitation activities is dependent on continued
access to capital on acceptable terms, whether through the Warehouse Facility
or otherwise.
The Company's Borrowing Agreement with two commercial banks (PNC Mortgage
Bank and LaSalle National Bank) commenced in July 1997 and was amended on
September 30, 1997 to allow the Company to
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<PAGE>
borrow up to $50 million to finance its operations. The Borrowing Agreement was
further amended to allow the Company to borrow up to $60 million through
February 17, 1998. These borrowings are to be repaid with the proceeds received
by the Company from the sale of its originated loans to institutional investors
or, in the case of residential rehabilitation activities, from the proceeds
from the sale of the properties. The Borrowing Agreement requires the Company
to comply with certain financial covenants, including maintaining a minimum
tangible net worth, levels and ratios of indebtedness, restrictions on the sale
or pledge of any future retained servicing rights, restrictions on the payments
of dividends and distributions and provisions with respect to merger, sale of
assets, acquisitions, change of control and change in senior management. The
Borrowing Agreement contains a cross default provision in the event that the
Company is in default of other loan agreements whereby the Company owes, in the
aggregate, more than $100,000. In addition, borrowings 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. As of September 30, 1997, total
borrowings outstanding under the Borrowing Agreement were $35 million. The
Company's Borrowing Agreement with these two banks expires on May 31, 1998, and
is terminable by the banks at any time without cause, upon 60 days notice to
the Company.
From August 1996 through November 1997, one of the commercial banks that
provides the Borrowing Agreement supplemented this lending facility through the
Gestation Agreement, which for financial reporting is characterized by the
Company as a borrowing transaction. The Gestation Agreement provides the
Company with up to $20 million of additional funds for loan originations
through the Company's sale to this bank of originated mortgage loans previously
funded under the Borrowing Agreement and committed to be sold to institutional
investors. Under the Gestation Agreement, the Company is required to arrange
for institutional investors to take delivery of the loans within 20 days of
their sale to the bank; otherwise the Company is required to repurchase the
loans. As of September 30, 1997, total fundings under this Gestation Agreement
were $20 million. On November 15, 1997 the Gestation Agreement expired. The
bank providing the Gestation Agreement exited the business of providing
gestation lines of credit, but allowed the Company to continue to utilize the
line of credit until January 15, 1998. Since January 15, 1998, the Company has
been allowed to maintain the outstanding balance under the Gestation Agreement,
but the Company is not allowed to borrow any additional funds. The Company will
repay the amount outstanding under the Gestation Agreement in the ordinary
course of business. The Company believes that other financial institutions will
provide it with a gestation line of credit, but no assurance can be made that
the Company will find such financial institution or that the line of credit
will be available on reasonable terms or at all. See "Business -- Loan Funding
and Borrowing Arrangements."
Any failure to renew or obtain adequate funding under the Warehouse
Facility, or any substantial reduction in the size of, or increase in the cost
of, such facilities, or the termination thereof, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. To the extent that the Company cannot successfully maintain its
existing Warehouse Facility or replace it with a comparable financing source,
it may be required to curtail its mortgage loan purchase and origination
activities, which could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Possible Need for Additional Financing
The proceeds of this Offering, together with the Company's existing
capital resources, including the funds from its Warehouse Facility, are
expected to enable the Company to fund its mortgage banking and residential
rehabilitation activities for a minimum of 12 months following completion of
the Offering. If the Company is required to seek additional capital in order to
maintain or obtain increases in its Warehouse Facility, such additional capital
may be raised by the sale of additional shares which may result in dilution to
the purchasers of the Shares offered hereby. To date, the Company has made no
attempts to identify possible sources of any future funding and has no
commitments for any future funding. There can be no assurance that the Company
will be able to obtain additional capital in the future on acceptable terms, or
at all. The type, timing and terms of such funding, if it is available at all,
will be determined by prevailing conditions in the financial markets and the
Company's financial condition, among other factors. If the Company requires,
but is unable to obtain additional capital, it may be required to significantly
curtail its mortgage banking and residential rehabilitation activities. In such
event, the business, prospects, financial condition and results of operations
of the Company could be materially adversely affected. See "Use of Proceeds,"
"Dilution" and "Business."
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Possible Fluctuations in Quarterly Performance
Several factors affecting the Company's business can cause significant
variations in its quarterly results of operations. These factors include,
without limitation, variations in the volume of the Company's loan
originations; the differences between the Company's cost of funds under its
Warehouse Facility and the average interest rates of originated loans; the
inability of the Company to complete significant loan sales transactions in a
particular quarter; and a decline or delay in the number of properties sold
under the Company's residential rehabilitation program. A delay in closing loan
sales transactions during a particular quarter would postpone recognition of
revenue on the sale of those loans until the quarter during which such loans
are sold. A delay in closing the sale of properties under the Company's
residential rehabilitation program during a particular quarter would postpone
the Company's recording of revenue, and therefore its contractual income, from
the sale of such properties until the quarter during which such properties are
sold. In addition, unanticipated delays in closing particular loan sales or the
sale of a property under the Company's residential rehabilitation program would
also increase interest expense and the Company's exposure to interest rate
fluctuations by lengthening the period during which its variable rate
borrowings under its Warehouse Facility are outstanding. If the Company were
unable to sell a sufficient number of its loans in a particular reporting
period, the Company's revenues for such period would decline, resulting in
lower net income and possibly a net loss for such period, which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Because the Company holds title to the properties in its residential
rehabilitation program, for financial reporting purposes the Company records as
revenue on the sales of such properties the gross sales price of these
properties when sold to the ultimate purchasers and it records as cost of sales
an amount equal to the difference between such gross sales price and the amount
of its contracted income pursuant to its contracts with the independent real
estate agents. In the event that in the future the Company should determine not
to hold title to all or a portion of such properties, the revenues of the
Company may decline as the revenue recognized by the Company in such event
would equal such contracted income and the Company would recognize no cost of
sale.
Economic Conditions -- Adverse Effects of Economic Slowdown or Recession
The Company's business will be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material decline in real estate
values results in increased loan-to-value ratios, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default. To
the extent that prospective borrowers do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. Changes
in the level of consumer confidence, real estate values, prevailing interest
rates and investment returns expected by the financial community could make
mortgage loans of the types originated by the Company less attractive to
borrowers or investors because, among other things, the actual rates of
delinquencies and foreclosures on such loans could be higher under adverse
economic conditions than those currently experienced in the mortgage lending
industry in general. A decline in the volume of loan originations could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Any material decline in real estate values
may result in lower revenues to the Company from the sale of its residential
real estate purchased for rehabilitation. A material decline in the volume of
sales of residential real estate could have a material adverse effect on the
Company's business, prospects, financial condition and results of operation.
See "Risk Factors -- Dependence on Loan Sales for Future Mortgage Banking
Revenue."
Dependence on Loan Sales for Future Mortgage Banking Revenue
The Company seeks to generate mortgage banking revenue by regularly
selling for cash, at a premium, its entire portfolio of originated loans to a
small number of institutional investors. There can be no assurance that such
investors will continue to purchase loans or that they will be willing to
purchase loans on terms similar to those at which they have historically
purchased such loans. For the nine months ended September 30, 1997, all of the
Company's sub-prime mortgages were sold to IMC Mortgage Company ("IMC")
pursuant to a written agreement which expired on September 30, 1997. The
Company and IMC have not renewed this agreement, but the Company continues to
sell substantially all of its sub-prime mortgages to IMC. For the nine months
ended
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September 30, 1997, Norwest Funding, Inc. and Chase Manhattan Mortgage, Inc.
purchased approximately 49% and 14%, respectively, of the Company's prime
credit and FHA/VA classified mortgages, including those that conform to
mortgage purchase programs that are administered by government sponsored
agencies, such as the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, and the Government National Mortgage Association
("FNMA," "FHLMC" and "GNMA," respectively). There can be no assurance that such
purchasers will continue to purchase the Company's loans on terms similar to
those at which they have historically done so, if at all. To the extent that
the Company could not successfully replace such loan purchasers, the Company's
business, prospects, financial condition and results of operations could be
materially and adversely affected. Further, adverse conditions in the
mortgage-backed securitization market could negatively impact the ability of
the Company to complete loan sales, as many of the Company's loan purchasers
securitize the loans they purchase from the Company.
Increased Delinquencies, Foreclosures or Losses on Mortgage Loans to
Sub-Prime Borrowers May Adversely Affect Results of Operations
In April 1997, the Company established its subprime lending division to
increase mortgage originations for "B," "C" and "D" or "sub-prime" credit
classified borrowers. For the nine months ended September 30, 1997,
approximately 16% of the total principal amount of mortgages originated by the
Company were to borrowers in these credit classifications. Loans made to such
borrowers may entail a greater risk of delinquency and greater losses than
loans made to borrowers who utilize conventional mortgage sources.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Although the Company attempts to sell these mortgages
(as well as other mortgages) to institutional investors, usually on a
non-recourse basis (thereby limiting its risk of delinquency or default), at
prices which reflect the credit risk associated with such borrowers, any
sustained period of increased delinquencies, foreclosures or losses on such
loans after the loans are sold could adversely affect the pricing of the
Company's future loan sales and/or the willingness of investors to purchase
such loans from the Company or in general in the future. The Company's ability
to sell sub-prime loans could be materially adversely affected if there was an
increase in overall delinquencies, foreclosures and/or loss by sub-prime
borrowers. In such event, the business, prospects, financial condition and
results of operations of the Company could be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Risk Factors -- Economic Conditions."
Failure to Successfully Manage Interest Rate Volatility May Adversely Affect
Results of Operations
In general, when the Company establishes an interest rate at the
origination of a mortgage loan, it attempts to contemporaneously lock in an
interest yield to the institutional investor purchasing that loan from the
Company. By selling these mortgage loans shortly following origination, usually
on a non-recourse basis, the Company limits its exposure to interest rate
fluctuations. However, the operations and profitability of the Company are
likely to be adversely affected during any period of unexpected or rapid
changes in interest rates. For example, a substantial or sustained increase in
interest rates could adversely affect the ability of the Company to originate
loans. In such event, the business, prospects, financial condition and results
of operations of the Company could be materially adversely affected.
Fluctuating interest rates also may affect the net interest income earned
by the Company, resulting from the difference between the yield to the Company
on loans held pending sale and the interest paid by the Company for funds
borrowed under the Warehouse Facility. While the Company monitors the interest
rate environment, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in
interest rates. In such event, the business, prospects, financial condition and
results of operations of the Company could be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Geographic Concentration of Operations
For the nine months ended September 30, 1997, 99% of the mortgage loans
originated by the Company were secured by properties located in New York and
New Jersey. During such period, the properties in the Company's residential
rehabilitation program were primarily located in New York City and Long Island,
New York.
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Although the Company is planning to expand its mortgage origination network to
additional states, the Company's loan origination and other activities are
likely to remain concentrated in these states for the foreseeable future.
Consequently, the Company's business, prospects, financial condition and
results of operations are dependent, in part, upon general trends in the
economy and the residential real estate market, in these states. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Competition
The Company faces intense competition in all aspects of its mortgage
banking business. The Company competes with numerous financial institutions,
such as other mortgage banking companies, commercial banks, savings
associations, credit unions, loan brokers and insurance companies in the
origination of mortgage loans. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates charged to borrowers. Competition may be affected
by, among other things, fluctuations in interest rates and general economic
conditions. Although the Company believes that its competitive advantage exists
primarily in its offering of a broad array of mortgage loan products with
competitive features, its emphasis on the quality of its service, and the
pricing of its products at competitive rates, there can be no assurance that
the Company will be able to compete effectively in this highly competitive
industry, which could materially adversely affect the business, prospects,
financial condition and results of operations of the Company.
The current level of gains realized by the Company and its competitors on
the origination and sale of sub-prime mortgage loans could attract additional
competitors into this market. Certain large finance companies and conventional
mortgage originators have announced their intention to originate sub-prime
mortgage loans, and some of these competitors have commenced offering sub-prime
loan products to customers similar to the borrowers targeted by the Company. In
addition, establishing a broker-sourced loan business, such as the Company's
wholesale lending division, requires a substantially smaller commitment of
capital and human resources than a direct-sourced loan business. This
relatively low barrier to entry permits new competitors to enter this market
quickly and compete with the Company's wholesale lending business.
Additional competition may require the Company to lower the rates that it
charges borrowers, thereby potentially lowering the gain on future loan sales.
Increased competition may also reduce the volume of the Company's loan
originations and loan sales and increase the demand for the Company's
experienced personnel. The Company also faces a risk that their personnel will
leave the Company and work for a competitor. See "Risk Factors -- Ability of
the Company to Implement its Growth Strategy." In connection with the Company's
residential rehabilitation activities, the Company may, at a future date, face
competition from larger institutions that have significantly greater resources
and marketing capabilities than the Company.
Government Regulation
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations and credit activities. In
addition, these rules limit the interest rates, finance charges and other fees
the Company may assess, mandate extensive disclosure to the Company's
customers, prohibit discrimination and impose qualification and licensing
obligations on the Company. The Company's loan origination activities are
subject to the laws and regulations in each of the states in which those
activities are conducted. The Company's lending activities are also subject to
various federal laws, including the Federal Truth-in-Lending Act and Regulation
Z promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
federal and state statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and
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notices to borrowers and, in some cases, fix maximum interest rates, fees and
mortgage loan amounts. Failure to comply with these requirements can lead to
loss of approved status by the banking regulators of the various state
governments where the Company operates, demands for indemnification or mortgage
loan repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement actions by federal and state
governmental agencies. See "Business -- Regulation."
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance
substantially more difficult or expensive. In the event that the Company is
unable to comply with such laws or regulations, its business, prospects,
financial condition and results of operations may be materially adversely
affected.
Members of Congress, government officials and political candidates have
from time to time suggested the elimination of the mortgage interest deduction
for federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantage of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for mortgage loans offered by the Company.
Possible Environmental Liabilities
Through its residential rehabilitation activity, the Company acquires
title to properties. Also, it is possible that the Company may foreclose on
properties securing its mortgage loans. Under various federal, state and local
environmental laws, ordinances and regulations, the Company, as either the
current holder of title or as a previous holder of title may be (i) required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property and (ii) held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and clean up costs
incurred by such parties in connection with the contamination. Liability under
such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility.
Although the Company has not incurred any losses as a result of liabilities
under environmental laws, there can be no assurance that the Company will not
experience such losses in the future. Such liabilities may not be covered by
any insurance held by the Company, in which event the business, prospects,
financial condition and results of operations of the Company could be
materially adversely affected.
Holding Company Structure May Limit Payment of Dividends
PMCC Financial Corp. is a holding company which will conduct all of its
operations through its wholly-owned subsidiary, Premier. Therefore, the
Company's rights to receive revenue is dependent upon the success of Premier
and its subsidiaries. See "Dividend Policy."
Dependence upon Management
The Company's growth and development is dependent upon the services of
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. Ronald Friedman is
the son of Robert Friedman. Both Ronald Friedman and Robert Friedman will enter
into employment agreements upon consummation of this Offering that expire on
December 31, 1999. Although the Company has been able to hire and retain other
qualified and experienced management personnel, the loss of the services of
either Ronald Friedman or Robert Friedman for any reason could have a material
adverse effect on the Company. See "Management -- Employment Agreements."
Benefits to Existing Stockholders
Prior to the Exchange, Premier will declare a distribution to the Existing
Stockholders in an amount equal to a portion of its undistributed S corporation
earnings that will result in the Company's shareholders' equity
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<PAGE>
equaling $1.7 million at the date of the Offering. As of September 30, 1997,
such amount is currently estimated to be approximately $1.4 million. Such
distribution will be payable as follows: (i) $1 million will be payable out of
the net proceeds of this Offering, all of which is intended to reimburse the
Existing Stockholders for, or satisfy, approximate tax liabilities associated
with S corporation earnings; and (ii) a promissory note in the aggregate amount
of approximately $400,000, bearing an interest rate of 10% per annum, payable
in four equal quarterly installments of principal and interest, with the final
payment due within one year of the date of this Prospectus.
In connection with the Exchange, the Existing Stockholders will receive an
aggregate of 2,500,000 shares of Common Stock in exchange for all of their
outstanding shares of Premier. See "Reorganization and Termination of S
Corporation Status," "Use of Proceeds," and "Certain Transactions."
The Existing Stockholders originally acquired their shares at an average
cost of approximately $0.29 per share. Accordingly, the unrealized gain to the
Existing Stockholders (the difference between the value of the shares at the
initial public offering price of $9.00 per share and the original purchase
price of the shares) is approximately $21,782,000. See "Dilution."
Contingent Tax Liability
Prior to the Exchange, the Company, Premier and the Existing Stockholders
entered into a tax indemnification agreement (the "Tax Agreement") relating to
their respective income tax liabilities. Because the Company will be fully
subject to corporate income taxation after the termination of the Company's S
corporation status, the reallocation of income and deductions between the
period during which the Company was treated as an S corporation and the period
during which Premier and the Company will be subject to corporate income
taxation may increase the taxable income of one party while decreasing that of
another party. Accordingly, the Tax Agreement is intended to assure that taxes
are borne by the Company on the one hand and the Existing Stockholders on the
other only to the extent that such parties received the related income or
deductions. The Tax Agreement generally provides that, if an adjustment is made
by the Internal Revenue Service or state taxing authorities to the taxable
income of Premier and the Company for a year in which it was treated as an S
corporation, the Company will indemnify the Existing Stockholders, and the
Existing Stockholders will indemnify the Company, against any increase in the
indemnified party's income tax liability (including interest, penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. Moreover, the Tax Agreement specifically
provides that the Existing Stockholders will not be responsible for any portion
of any deferred tax liability recorded on the balance sheet of the Company upon
termination of the S corporation status. The Company will also indemnify the
Existing Stockholders for all taxes imposed upon them as a result of their
receipt of an indemnification payment under the Tax Agreement. The Tax
Agreement is not binding on the Internal Revenue Service or state taxing
authorities and the IRS could assert a claim against the Existing Stockholders
and/or the Company. Any payment made by the Company to the Existing
Stockholders pursuant to the Tax Agreement may be considered by the Internal
Revenue Service or state taxing authorities to be non-deductible by the Company
for income tax purposes. Neither parties' obligations under the Tax Agreement
are secured, and, as such, there can be no assurance that the Existing
Stockholders or the Company will have funds available to make any payments
which may become due under the Tax Agreement.
Absence of Prior Public Market and Possible Volatility of Stock Price
Prior to this Offering, there has been no public market for the Common
Stock. The Company has made an application to list the Common Stock on the
American Stock Exchange, subject to approval and notice of issuance. However,
there can be no assurance that an active public trading market for the Common
Stock will develop after this Offering or that, if developed, such market will
be sustained. The public offering price of the Shares offered hereby was
determined by negotiations among the Company and the Representative and may not
be indicative of the price at which the Common Stock will trade after this
Offering. See "Underwriting."
The market price of the Shares may experience fluctuations unrelated to
the operating performance of the Company. In particular, the market price of
the Shares may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest
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<PAGE>
rate movements and delinquency trends. In addition, the stock markets in the
United States have, from time to time, experienced significant price and volume
fluctuations that are unrelated or disproportionate to the operating
performance of individual companies. Such fluctuations could materially
adversely affect the market price of the Shares. See "Underwriting."
Immediate and Substantial Dilution
As of September 30, 1997, the pro forma net tangible book value per share
of Common Stock was $0.68 per share, substantially less than the initial public
offering price of $9.00 per share to be paid by public investors. Upon
completion of this Offering, the net tangible book value will be approximately
$2.97 per share, representing dilution to the public investors of approximately
67%. As a result, investors purchasing the Shares will incur immediate and
substantial dilution. See "Dilution."
Absence of Dividends
The Company has not paid any cash dividends (except that prior to the
Exchange, Premier made S corporation distributions to the Existing
Stockholders) on the Common Stock since its inception and does not currently
anticipate paying dividends on the Common Stock in the foreseeable future. The
Company conducts substantially all of its operations through its subsidiary,
Premier. Accordingly, the Company's ability to pay dividends is also dependent
upon the ability of Premier to make cash distributions to the Company. The
payment of dividends by the Company is and will continue to be restricted by or
subject to, among other limitations, applicable provisions of federal and state
laws, contractual provisions under the Warehouse Facility, the earnings of
Premier and various business considerations. See "Risk Factors -- Holding
Company Structure," "Risk Factors -- Dependence on Warehouse Financing Sources"
and "Dividend Policy."
Shares Available for Future Sale
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this Offering, pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise, could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the sale of its equity
securities or debt financing. The availability of Rule 144 to the holders of
restricted securities of the Company would be conditioned on, among other
factors, the availability of certain public information concerning the Company.
All of the 2,500,000 shares of Common Stock currently outstanding are
"restricted securities" as that term is defined in Rule 144 and may be sold at
anytime through an effective registration statement registering those shares or
under certain circumstances, be sold without such registration under the
Securities Act. In addition, shares issuable upon exercise of options granted
under the Plan, pursuant to Rule 701 under the Securities Act, could be sold
publicly commencing 90 days after the Company becomes a reporting company under
the Exchange Act. All officers, directors and stockholders of the Company have
executed agreements ("Lock-Up Agreements") pursuant to which they have agreed
not to, directly or indirectly, issue, offer, agree to sell, sell, grant an
option for the purchase or sale of, transfer, pledge, assign, hypothecate,
distribute, or otherwise dispose of, or encumber any shares of Common Stock or
options, rights, warrants, or other securities convertible into, or exercisable
or exchangeable for, or evidencing any right to purchase or subscribe for,
shares of Common Stock, whether or not beneficially owned by such person, or
any beneficial interest therein for a period of 15 months from the date of this
Prospectus. See "Underwriting."
For a period of 15 months from the date of this Prospectus, the Company
has agreed that it will not sell or otherwise dispose of any securities of the
Company without the prior written consent of the Representatives, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, during such
period, the Company shall be entitled to issue (i) shares of Common Stock in
connection with mergers and acquisitions, (ii) up to 375,000 shares of Common
Stock issuable upon exercise of options which may be granted under the 1997
Plan, (iii) up to 375,000 shares of Common Stock issuable upon exercise of
options which have been granted under the Premier Plan, and (iv) shares of
Common Stock issuable, directly or indirectly, upon the exercise of the
Representatives' Warrants (the "Warrant Shares").
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Effects of Certain Anti-Takeover Provisions
Certain provisions of the Company's Amended Certificate of Incorporation
and Delaware Law may be deemed to have an anti-takeover effect. The Company's
Certificate of Incorporation provides that the Board of Directors may issue
additional shares of Common Stock or establish one or more classes or series of
Preferred Stock with such designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors shall fix without stockholder approval. Moreover, the Company's
Certificate of Incorporation and By-Laws provide that its Board of Directors is
divided into three classes serving staggered three year terms, resulting in
approximately one-third of the directors being elected each year and certain
other provisions relating to voting and the removal of the officers and
directors. In addition, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law. In general, such
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Each of the foregoing provisions may have the effect of
rendering more difficult, delaying, discouraging, preventing or rendering more
costly an acquisition of the Company or a change in control of the Company. See
"Description of Capital Stock -- Anti-Takeover Provisions; Section 203 of the
Delaware General Corporation Law."
Effects of Preferred Stock
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), in one or
more series, to designate the number of shares constituting any series, and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, voting rights, rights and terms of redemption, redemption
price or prices and liquidation preferences of such series. The issuance of
shares of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders, even where stockholders are offered a premium for their shares.
The issuance of shares of Preferred Stock with voting and conversion rights may
adversely effect the voting power of the holders of Common Stock, including the
loss of voting control. The Company has no present plans to issue any shares of
Preferred Stock. See "Risk Factors -- Effects of Certain Anti-Takeover
Provisions."
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REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
From January 1992 through the date of this Prospectus, Premier was treated
for federal income tax purposes as an S corporation, and was treated as an S
corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, Premier's historical earnings since January
1, 1992 have been taxed directly to Premier's stockholders at their individual
federal and state income tax rates, rather than to Premier. On the date of the
Exchange, pursuant to the terms of a contribution agreement (the "Contribution
Agreement"), the existing Premier stockholders, Ronald Friedman and Robert
Friedman (the "Existing Stockholders"), will contribute all of the shares of
capital stock of Premier that they beneficially own or otherwise control to the
Company in exchange for an aggregate 2,500,000 shares of Common Stock, which
will constitute all of the stock of the Company outstanding prior to this
Offering. As a result of the Exchange, the Company and Premier, which will be a
wholly owned subsidiary of the Company, will be fully subject to federal and
state income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of
the date of termination of Premier's S corporation status will depend upon
timing differences between tax and book accounting. During each of the years
ended December 31, 1994, 1995 and 1996 and for the nine months ended September
30, 1997, Premier has made S corporation distributions to the Existing
Stockholders in the aggregate amounts of approximately $102,000, $150,000,
$267,000 and $365,000, respectively.
Prior to the Exchange, Premier will declare a distribution to the Existing
Stockholders in an amount equal to a portion of its undistributed S corporation
earnings that will result in the Company's shareholders' equity equaling $1.7
million at the date of the Offering. As of September 30, 1997, such amount is
currently estimated to be approximately $1.4 million. Such distributions will
be payable as follows: (i) $1 million will be payable out of the net proceeds
of this Offering, all of which is intended to reimburse the Existing
Stockholders for, or satisfy, approximate tax liabilities associated with S
corporation earnings; and (ii) a promissory note (the "S-Note") in the
aggregate principal amount of approximately $400,000, bearing an interest rate
of 10% per annum, payable in four equal quarterly installments of principal and
interest, with the final payment due within one year of the date of this
Prospectus.
Prior to the Exchange, the Company, Premier and the Existing Stockholders
entered into a tax indemnification agreement (the "Tax Agreement") relating to
their respective income tax liabilities. Because the Company will be fully
subject to corporate income taxation after the termination of the Company's S
corporation status, the reallocation of income and deduction between the period
during which the Company was treated as an S corporation and the period during
which Premier and the Company will be subject to corporate income taxation may
increase the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreement is intended to assure that taxes are
borne by the Company on the one hand and the Existing Stockholders on the other
only to the extent that such parties received the related income. The Tax
Agreement generally provides that, if an adjustment is made by the Internal
Revenue Service or state taxing authorities to the taxable income of Premier
and the Company for a year in which it was treated as an S corporation, the
Company will indemnify the Existing Stockholders, and the Existing Stockholders
will indemnify the Company, against any increase in the indemnified party's
income tax liability (including interest, penalties and related costs and
expenses), with respect to any tax year to the extent such increase results in
a related decrease in the income tax liability of the indemnifying party for
that year. Moreover, the Tax Agreement specifically provides that the Existing
Stockholders will not be responsible for any portion of any deferred tax
liability recorded on the balance sheet of the Company upon termination of the
S corporation status. The Company will also indemnify the Existing Stockholders
for all taxes imposed upon them as a result of their receipt of an
indemnification payment under the Tax Agreement. The Tax Agreement is not
binding on the Internal Revenue Service or state taxing authorities and the IRS
could assert a claim against the Existing Stockholders and/or the Company. Any
payment made by the Company to the Existing Stockholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes.
Neither parties' obligations under the Tax Agreement are secured, and, as such,
there can be no assurance that the Existing Stockholders or the Company will
have funds available to make any payments which may become due under the Tax
Agreement.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company, after deducting all of the
expenses of this Offering, are estimated to be approximately $9.45 million,
based upon the initial public offering price of $9.00 per share.
The Company intends to use the estimated net proceeds of this Offering as
follows:
<TABLE>
<CAPTION>
Application of Net Proceeds Amount Percent
--------------------------- ------------ ----------
<S> <C> <C>
Expand mortgage banking operations ......................... $2,000,000 21.2%
Fund future residential rehabilitation properties .......... 2,000,000 21.2%
Upgrade information systems ................................ 1,000,000 10.6%
S corporation distributions to pay income taxes ............ 1,000,000 10.6%
General corporate and working capital ...................... 3,450,000 36.4%
---------- -----
Total ................................................... $9,450,000 100.0%
========== =====
</TABLE>
Prior to such use, the remaining net proceeds will be used to reduce
borrowings under the Warehouse Facility. The net proceeds, if any, from the
exercise of the Underwriters' over-allotment option will be utilized to reduce
borrowings under the Warehouse Facility.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the sale of the Shares based upon the Company's operations,
the Company's business plan, and current economic and industry conditions and
is subject to reapportionment of proceeds among the categories listed above or
to new categories in response to, among other things, changes in the Company's
plans, regulations, industry conditions, and future revenues and expenditures.
The amount and timing of expenditures will vary depending on a number of
factors, including changes in the Company's operations or business plan and
changes in economic and industry conditions.
Based on the operating plan, the Company believes that the net proceeds of
this Offering, together with revenues from continuing operations, will be
sufficient to satisfy its capital requirements and finance its plans for
expansion for at least the next 12 months. Such belief is based upon certain
assumptions, and there can be no assurance that such assumptions are correct.
Accordingly, there can be no assurance that such resources will satisfy the
Company's capital requirements for said period. The Company may require
additional financing in order to expand its operations. Such financing may take
the form of the issuance of common or preferred stock or debt securities,
and/or may involve bank or other lender financing. There can be no assurance
that the Company will be able to obtain needed additional capital on a timely
basis, on favorable terms, or at all.
DIVIDEND POLICY
The Company has not paid any cash dividends (except that prior to the
Exchange, Premier made S corporation distributions to the Existing
Stockholders) on the Common Stock since its inception and does not currently
anticipate paying dividends on the Common Stock in the foreseeable future. The
Company conducts substantially all of its operations through its subsidiary,
Premier. Accordingly, the Company's ability to pay dividends is also dependent
upon the ability of Premier to make cash distributions to the Company. The
payment of dividends by the Company is and will continue to be restricted by or
subject to, among other limitations, applicable provisions of federal and state
laws, contractual provisions under the Warehouse Facility, the earnings of
Premier and various business considerations.
18
<PAGE>
DILUTION
As of September 30, 1997, the Company had a pro forma net tangible book
value of approximately $0.68 per share of Common Stock outstanding. Pro forma
net tangible book value equals the total assets less intangible assets and
total liabilities divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of the Shares
offered hereby at the initial public offering price of $9.00 per share and the
application of the net proceeds therefrom, the pro forma net tangible book
value of the Company as of September 30, 1997, would be approximately $2.97 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.29 per share to current stockholders and an immediate dilution of
$6.03 per share, or approximately 67%, to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price ................................ $ 9.00
Pro forma net tangible book value before Offering ......... $ 0.68
Increase attributable to new investors .................... 2.29
------
Pro forma net tangible book value after Offering ............. 2.97
------
Dilution to new investors .................................... $ 6.03
======
</TABLE>
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of total shares of
Common Stock purchased, the total cash consideration paid, the percentage of
total cash consideration paid, and the average cash price per share of Common
Stock paid by the investors in this Offering and the Existing Stockholders of
the Company:
<TABLE>
<CAPTION>
Total Cash Consideration
Shares Purchased Paid Average
----------------------- --------------------------- Cash Price
Number Percent Amount Percent Per Share
----------- --------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ......... 2,500,000 66.7% $ 718,025 6.0% $ 0.29
New Investors ................. 1,250,000 33.3% $ 11,250,000 94.0% $ 9.00
--------- ----- ------------ -----
Total ...................... 3,750,000 100.0% $ 11,968,025 100.0%
========= ===== ============ =====
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1997, (ii) the pro forma capitalization of the Company as of
September 30, 1997 giving effect to the Exchange and (iii) the pro forma
capitalization of the Company as of September 30, 1997 giving effect to the
Exchange and the sale of the Shares offered hereby at the public offering price
of $9.00 per share and the application by the Company of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements, and the Notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------
($ in thousands)
Pro Forma As
Actual Pro Forma (1) Adjusted (2)
---------- --------------- -------------
<S> <C> <C> <C>
Debt:
Warehouse Facility ............................... $55,881 $55,881 $55,881
Loans from affiliates ............................ 3,035 3,035 3,035
S corporation distribution payable ............... -- 1,393 393
Notes payable -- other ........................... 763 763 763
Notes payable to shareholder ..................... 293 293 293
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized and none issued ..................... -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 2,500,000 shares issued and out-
standing, actual and 3,750,000 shares issued and
outstanding, as adjusted (3) ................... 6 6 38
Additional paid-in-capital ....................... 712 712 11,056
Retained earnings (including unrealized gain on
securities available-for-sale of $56)........... 3,340 982 56
------- ------- -------
Total shareholders' equity ....................... 4,058 1,700 11,150
------- ------- -------
Total capitalization ........................... $64,030 $63,065 $72,565
======= ======= =======
</TABLE>
- ------------
(1) Prior to the Exchange, Premier was treated as an S corporation for federal
and state income tax purposes. See "Reorganization and Termination of S
Corporation Status." The pro forma presentation reflects the recording of
a deferred tax liability and distribution of a portion of retained
earnings.
(2) Adjusted to give effect to the sale by the Company of the Shares at the
initial public offering price of $9.00 per share, and adjusted to give
effect to the reclassification of undistributed S corporation earnings of
$926,000 from retained earnings to additional paid-in-capital.
(3) At September 30, 1997, Premier's capitalization was 3,500 shares authorized,
125 shares outstanding.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected statement of operations data for the year ended
December 31, 1996, and the selected balance sheet data at December 31, 1996 are
derived from the Consolidated Financial Statements of the Company and Notes
thereto audited by KPMG Peat Marwick LLP, independent certified public
accountants for the Company. The following selected statement of operations
data for the years ended December 31, 1993, 1994 and 1995, and the selected
balance sheet data at December 31, 1993, 1994 and 1995 are derived from the
Financial Statements of the Company and Notes thereto audited by Freeberg &
Freeberg, independent certified public accountants for the Company. The
following selected statement of operations data for the year ended December 31,
1992, and the selected balance sheet data at December 31, 1992 are derived from
the Financial Statements of the Company and Notes thereto audited by Fein &
Fein, independent certified public accountants for the Company. The
Consolidated Financial Statements for the years ended December 31, 1994, 1995,
and 1996 and at December 31, 1995 and 1996 are included elsewhere herein. The
unaudited selected statement of operations data for the nine months ended
September 30, 1996 and 1997 and the unaudited selected balance sheet data at
September 30, 1997, are derived from the unaudited Consolidated Financial
Statements of the Company, included elsewhere herein, which have been prepared
on a basis consistent with the audited Consolidated Financial Statements of the
Company and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations. The results of
operations for the interim period presented are not necessarily indicative of
results to be expected for the entire year. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of Operations Data: ---------------------------------------------------------
($ in thousands, except share data)
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Revenue ..................................... $1,076 $1,464 $1,187 $3,400 $ 11,943
Net income .................................. 231 303 62 196 1,034
Provision for pro forma income taxes (1) 391
Pro forma net income ........................ 517
Pro forma net income per share (2) .......... $ 0.20
Pro forma weighted average number of
common shares and share equivalents
outstanding ................................ 2,611,111
<CAPTION>
Nine Months Ended
September 30,
Statement of Operations Data: ------------------------
($ in thousands, except share data)
1996 1997
--------- -------------
<S> <C> <C>
Revenue ..................................... $5,864 $ 27,573
Net income .................................. 770 2,489
Provision for pro forma income taxes (1) 1,000
Pro forma net income ........................ 1,423
Pro forma net income per share (2) .......... $ 0.53
Pro forma weighted average number of
common shares and share equivalents
outstanding ................................ 2,694,751
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September
Year Ended December 31, 30,
Operating Data: ------------------------------------ ------------------------
($ in thousands)
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage loans originated
Conventional (prime credit) (3) ................ $46,700 $51,300 $ 75,400 $54,900 $122,400
FHA/VA ......................................... -- 19,400 57,700 41,800 52,300
Sub-Prime (B, C, D credit) (3) ................. -- -- -- -- 33,300
------- ------- -------- ------- --------
Total dollar amount of loans originated ........ $46,700 $70,700 $133,100 $96,700 $208,000
======= ======= ======== ======= ========
Total number of loans originated ............... 273 470 890 636 1,430
Average principal balance per loan
originated .................................... $ 171 $ 150 $ 150 $ 152 $ 145
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
Balance Sheet Data: -----------------------------------------------
($ in thousands)
1992 1993 1994 1995 1996
------ ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Receivable from sales of loans ................ -- -- -- $1,357 $ 9,838
Mortgage loans held for sale, net ............. -- $ 32 $ 582 5,537 2,875
Residential rehabilitation properties being
financed ..................................... -- -- -- -- 3,246
Total assets .................................. $473 574 1,098 8,232 17,153
Borrowings under Warehouse Facility ........... -- -- 557 6,476 13,923
Amount due to affiliates and shareholder ...... -- 9 8 465 1,037
Total liabilities ............................. 68 69 633 7,117 15,258
Shareholders' equity .......................... 405 505 465 1,114 1,878
<CAPTION>
At September 30, 1997
Balance Sheet Data: --------------------------------------------
($ in thousands)
Pro Forma Pro Forma
Actual (1) as Adjusted (1)(4)
---------- ----------- -------------------
<S> <C> <C> <C>
Receivable from sales of loans ................ $31,104 $31,104 $31,104
Mortgage loans held for sale, net ............. 19,809 19,809 19,809
Residential rehabilitation properties being
financed ..................................... 12,408 12,408 12,408
Total assets .................................. 64,819 64,819 73,269
Borrowings under Warehouse Facility ........... 55,881 55,881 55,881
Amount due to affiliates and shareholder ...... 3,328 3,328 3,328
Total liabilities ............................. 60,761 63,119 62,119
Shareholders' equity .......................... 4,058 1,700 11,150
</TABLE>
- ------------
(1) Prior to the Exchange, Premier was treated as an S corporation for federal
and state income tax purposes. See "Reorganization and Termination of S
Corporation Status." The pro forma presentation for statement of
operations data reflects the provision for income taxes as if Premier had
always been a C corporation at assumed effective tax rates of
approximately 42%. The pro forma statement of operations data also
reflects an increase in officer compensation expense pursuant to proposed
employment contracts. The pro forma presentation for balance sheet data
reflects the deferred tax liability and the distribution payable to be
recorded as of the date of the termination of the S corporation status.
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of common shares and share
equivalents outstanding, including the estimated number of shares that
would be necessary to fund a $1 million S corporation distribution.
(3) For the years ended December 31, 1994, 1995 and 1996, the Company estimates
that the sub-prime loans accounted for less than 5% of the Company's total
originations for those years and are included in conventional loans for
those years.
(4) Adjusted to give effect to the sale by the Company of the Shares at the
initial public offering price of $9.00 per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other portions of this Prospectus contain
forward-looking information that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated by such
forward-looking statements. Factors that may cause such differences include,
but are not limited to, those discussed under the heading "Risk Factors" and
elsewhere in this Prospectus. This Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
General
PMCC Financial Corp. is a specialty consumer financial services company
providing a broad array of residential mortgage products to customers ranging
from prime credit borrowers seeking "conventional" or FHA/VA loans to persons
who cannot so qualify, i.e., so-called "B," "C" and "D" or "sub-prime" credit
borrowers, seeking "non-conventional" loans. Since mid-1996, the Company has
expanded and diversified its mortgage banking activities by establishing a
program to provide short-term financing for one to four family residential
rehabilitation properties, opening a fully-staffed wholesale division and
significantly increasing its "B," "C" and "D" mortgage originations.
The Company's revenues are primarily generated from the premiums it
receives on the sale of mortgage loans it originates, and from interest earned
during the period the Company holds mortgage loans for sale. The Company's
mortgage loans, together with servicing rights to these mortgages, are sold
usually on a non-recourse basis to institutional investors, in each case within
approximately seven to 30 days of the date of origination of the mortgage. In
general, when the Company establishes an interest rate at the origination of a
mortgage loan, it attempts to contemporaneously lock in an interest yield to
the institutional investor purchasing that loan from the Company. By selling
these mortgage loans shortly following origination, the Company limits its
exposure to interest rate fluctuations and credit risks. Furthermore, by
selling its mortgage loans on a "servicing-released" basis, the Company avoids
the administrative and collection expenses of managing and servicing a loan
portfolio and it avoids a risk of loss of anticipated future servicing revenue
due to mortgage prepayments in a declining interest rate environment.
The Company also generates income by charging fees to provide short-term
funding to independent real estate agencies for the purchase, rehabilitation
and resale of vacant one-to-four family residences in New York City and Long
Island, New York. The Company provides this funding to several independent real
estate agencies who specialize in the rehabilitation and marketing of these
properties. As security for providing the independent real estate agencies with
the funding to accomplish the purchase, rehabilitation and resale of the
property, title to these properties is held by the Company. The Company's
income from this activity is limited to the fees and interest charged in
connection with providing the funding and is not related to any gain or loss on
the sale of the property. From the commencement of this activity on September
1, 1996 through December 31, 1996, the Company completed 35 transactions and
recorded revenues of $5.1 million and cost of sales of $4.8 million. During the
nine months ended September 30, 1997, the Company completed 118 such
transactions and at September 30, 1997, the Company had 140 properties in
various stages of rehabilitation and awaiting resale. The Company's revenues
and costs of sales from this activity for the nine months ended September 30,
1997 were $17.5 million and $16.5 million, respectively. Although the Company
expects to continue this activity in its markets, there can be no assurance
that the Company's historical rate of growth of this activity will continue in
future periods.
The Company has experienced significant growth in recent years,
originating $47 million in mortgage loans in 1994, $71 million in mortgage
loans in 1995, $133 million in mortgage loans in 1996 and $208 million in
mortgage loans in the nine months ended September 30, 1997. For the nine months
ended September 30, 1997, sub-prime loans originated by the Company accounted
for 16% of its total mortgage originations. For its fiscal years ended December
31, 1995 and 1996 and for the nine months ended September 30, 1997, the Company
had revenues from its mortgage banking activities of $3.4 million, $6.8 million
and $10.1 million, respectively.
There can be no assurance that the Company's historical rate of growth
will continue in future periods.
22
<PAGE>
Results of Operations
Nine Months Ended September 30, 1996 and 1997
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1997
------------- --------------
<S> <C> <C>
Sales of residential rehabilitation properties ......... $1,016,500 $17,519,462
Gains on sales of mortgage loans ....................... 4,254,846 8,641,550
Interest earned ........................................ 563,261 1,412,083
Gain on sale of securities available for sale .......... 29,605 --
---------- -----------
Total revenues ......................................... $5,864,212 $27,573,095
========== ===========
</TABLE>
Sales of residential rehabilitation properties increased by $16.5 million
to $17.5 million for the nine months ended September 30, 1997 from $1.0 million
for the nine months ended September 30, 1996. This increase was primarily due
to the increase in the number of properties sold which increased to 118 for the
nine months ended September 30, 1997 from nine for the nine months ended
September 30, 1996. The Company completed 28, 32 and 58 sales for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997, respectively.
Gains on sales of mortgage loans increased by $4.4 million, or 103%, to
$8.6 million for the nine months ended September 30, 1997 from $4.3 million for
the nine months ended September 30, 1996. This increase was primarily due to
(a) increased loan originations and loan sales by the Company's existing retail
offices, and (b) loan originations and sales by the Company's New Jersey
wholesale division and New York B-C-D division, which commenced operations in
January 1997 and April 1997, respectively. The Company has increased its
mortgage originations during each quarter of 1997. Total mortgage originations
were $38.3 million, $71.4 million and $98.3 million for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997, respectively. Although
there can be no assurance thereof, the Company expects mortgage originations to
increase, and therefore believes that its loan origination fees, interest
income and gains on sales of mortgage loans will increase.
Interest earned increased by $850,000, or 151%, to $1.4 million for the
nine months ended September 30, 1997 from $563,000 for the nine months ended
September 30, 1996. This increase was primarily attributable to increased
mortgage originations during the nine months ended Sepember 30, 1997 as
compared to the nine months ended September 30, 1996 and an increase in the
amount of sub-prime mortgage originations which generally are held for sale
longer than conventional originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September
30,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Costs of sales -- residential rehabilitation properties ......... $ 951,744 16,522,515
Compensation and benefits ....................................... 2,617,789 4,790,405
Advertising and promotion ....................................... 114,359 132,460
Broker fees paid and other loan costs ........................... 124,368 669,232
Occupancy and equipment ......................................... 161,392 243,003
Messenger service ............................................... 56,929 79,220
Office supplies and expense ..................................... 117,623 126,077
Telephone ....................................................... 87,318 138,296
Interest expense ................................................ 534,175 1,573,591
Other operating expenses ........................................ 308,299 784,032
---------- ----------
Total expenses .................................................. $5,073,996 $25,058,831
========== ===========
</TABLE>
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 increases in expenses.
23
<PAGE>
Costs of sales -- residential rehabilitation properties increased by $15.6
million to $16.5 million for the nine months ended September 30, 1997 from $1.0
million for the nine months ended September 30, 1996. This increase was
primarily due to the increase in the number of properties purchased and sold.
Compensation and benefits expenses increased by $2.2 million, or 83%, to
$4.8 million for the nine months ended September 30, 1997 from $2.6 million for
the nine months ended September 30, 1996. This increase was primarily
attributable to increased sales' salaries and commissions, which are based
substantially on loan production. Administrative and support personnel
increased from 29 employees at September 30, 1996 to 52 employees at September
30, 1997.
Broker fees and other loan costs increased by $545,000, or 438%, to
$669,000 for the nine months ended September 30, 1997 from $124,000 for the
nine months ended September 30, 1996. This increase was primarily attributable
to a substantial increase in the amount of loans originated by the Company's
wholesale division during this period.
Occupancy and equipment expenses increased by $82,000, or 51%, to $243,000
for the nine months ended September 30, 1997 from $161,000 for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in various equipment leases, and the recent expansion of office space, both in
New Jersey and New York.
Messenger service expense increased by $22,000, or 39%, to $79,000 for the
nine months ended September 30, 1997 from $57,000 for the nine months ended
September 30, 1996. This increase was primarily attributable to the increase in
mortgage originations.
Office supplies and expense increased by $8,000, or 7%, to $126,000 for
the nine months ended September 30, 1997 from $118,000 for the nine months
ended September 30, 1996. This increase was primarily attributable to the
increase in mortgage originations.
Telephone expense increased by $51,000, or 58%, to $138,000 for the nine
months ended September 30, 1997 from $87,000 for the nine months ended
September 30, 1996. This increase was primarily attributable to the increase in
the number of employees resulting from the increase in mortgage originations.
Interest expense increased by approximately $1.0 million, or 195%, to $1.6
million for the nine months ended September 30, 1997 from $534,000 for the nine
months ended September 30, 1996. Of this increase, approximately $764,000 was
attributable to the increase in the volume of mortgage loans funded through the
Company's Warehouse Facility. The remaining increase was primarily attributable
to interest paid to the Company's warehouse banks and the Company's affiliates
relating to the funding of residential rehabilitation properties.
Other operating expenses increased by $476,000, or 154%, to $784,000 for
the nine months ended September 30, 1997 from $308,000 for the nine months
ended September 30, 1996. This increase was partially attributable to legal,
accounting and professional fees, which increased by $88,000 from the prior
period. The remainder of the increase was attributable to increased expenses
incurred in connection with the growth in the operations of the Company.
Years Ended December 31, 1995 and 1996
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Sales of residential rehabilitation properties ......... -- $ 5,073,253
Gains on sales of mortgage loans ....................... $3,168,565 6,104,397
Interest earned ........................................ 231,916 735,802
Gain on sale of securities available for sale .......... -- 29,605
---------- -----------
Total revenues ......................................... $3,400,481 $11,943,057
========== ===========
</TABLE>
24
<PAGE>
Revenue from sales of residential rehabilitation properties increased to
$5.1 million for the year ended December 31, 1996 from $0 for the year ended
December 31, 1995. This activity commenced in September 1996.
Gains on sales of mortgage loans increased by $2.9 million, or 93%, to
$6.1 million for the year ended December 31, 1996 from $3.2 million for the
year ended December 31, 1995. This increase was primarily due to increased loan
originations and loan sales by the Company's existing retail offices and an
increase in the number of properties sold to 35 for year ended December 31,
1996 from 0 for the year ended December 31, 1995. Although there can be no
assurance thereof, the Company expects mortgage originations to increase, and
therefore believes that its loan origination fees, interest income and gains on
sales of mortgage loans will increase.
Interest earned increased by $500,000, or 217%, to $736,000 for the year
ended December 31, 1996 from $232,000 for the year ended December 31, 1995.
This increase was primarily attributable to the increase in mortgage
origination for 1996 as compared to 1995 and to the Company utilizing its
Warehouse Facility to a greater degree in 1996. During 1995, a portion of its
mortgage originations were funded directly by institutional investors at
closing.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Costs of sales -- residential rehabilitation properties ......... -- $ 4,788,944
Compensation and benefits ....................................... $2,069,443 3,674,490
Advertising and promotion ....................................... 71,879 207,381
Broker fees paid and other loan costs ........................... 85,555 237,147
Occupancy and equipment ......................................... 157,734 208,929
Messenger service ............................................... 50,533 81,400
Office supplies and expense ..................................... 83,087 155,868
Telephone ....................................................... 106,547 120,239
Interest expense ................................................ 245,281 839,284
Other operating expenses ........................................ 327,262 564,190
---------- -----------
Total expenses .................................................. $3,197,321 $10,877,872
========== ===========
</TABLE>
Costs of sales -- residential rehabilitation properties increased to $4.8
million for the year ended December 31, 1996 from $0 for the year ended
December 31, 1995. This activity commenced in September, 1996.
Compensation and benefits expenses increased by $1.6 million, or 78%, to
$3.7 million for the year ended December 31, 1996 from $2.1 million for the
year ended December 31, 1995. This increase was primarily attributable to
increased sales' salaries and commissions, which are based substantially on
loan production. Administrative and support personnel increased from 17
employees at December 31, 1995 to 33 employees at December 31, 1996.
Advertising and promotion expenses increased by $136,000, or 189%, to
$207,000 for the year ended December 31, 1996 from $72,000 for the year ended
December 31, 1995. This increase was primarily attributable to the promotional
costs associated with loan origination activities, and, to a lesser extent,
direct marketing and general advertising.
Broker fees paid and other loan costs increased $152,000, or 177%, to
$237,000 for the year ended December 31, 1996 from $86,000 for the year ended
December 31, 1995. This increase was primarily attributable to the increase in
mortgage loans originated.
Occupancy and equipment expenses increased by $51,000, or 32%, to $209,000
for the year ended December 31, 1996 from $158,000 for the year ended December
31, 1995. This increase was primarily attributable to increases in various
equipment leases.
Messenger service expenses increased by $31,000, or 61%, to $81,000 for
the year ended December 31, 1996 from $51,000 for the year ended December 31,
1995. This increase was primarily attributable to the increase in mortgage
originations.
Office supplies and expense increased by $73,000, or 88%, to $156,000 for
the year ended December 31, 1996 from $83,000 for the year ended December 31,
1995. This increase was primarily attributable to the increase in mortgage loan
originations.
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Telephone expense increased $14,000, or 13%, to $120,000 for the year
ended December 31, 1996 from $107,000 for the year ended December 31, 1995.
This increase was primarily attributable to the increase in the number of
employees resulting from the increase in mortgage orginations.
Interest expense increased by $594,000, or 242%, to $839,000 for the year
ended December 31, 1996 from $245,000 for the year ended December 31, 1995.
This increase was primarily attributable to the increase in the volume of
loans, substantially all of which were funded through the Company's Warehouse
Facility. Approximately $77,000 of the increase relates to interest paid on the
Company's Warehouse Facility and to the Company's affiliates relating to real
estate rehabilitation financing during the period.
Other operating expenses increased by $237,000, or 72%, to $564,000 for
the year ended December 31, 1996 from $327,000 for the year ended December 31,
1995. This increase was primarily attributable to the Company's increased
volume of loan originations.
Years Ended December 31, 1994 and 1995
Total revenues increased $2.2 million, or 187%, to $3.4 million for the
year ended December 31, 1995 from $1.2 million for the year ended December 31,
1994. This increase in revenues was primarily attributable to the increase in
loan originations relating to the opening and expansion of the New York retail
division in late 1994. The increase in 1995 loan originations was also
attributable to the more favorable interest rate and economic environment in
1995 from 1994.
Total expenses increased by $2.1 million, or 184%, to $3.2 million for the
year ended December 31, 1995 from $1.1 million for the year ended December 31,
1994. This increase was primarily attributable to increased costs associated
with additional personnel required to process the greater volume of
originations and greater operating expenses related to the increase in loan
originations during the year ended December 31, 1995 as compared to the year
ended December 31, 1994.
Compensation and benefit expenses increased by $1.4 million, or 192%, to
$2.1 million for the year ended December 31, 1995 from $709,000 for the year
ended December 31, 1994. This increase was primarily attributable to increased
sales' salaries and commissions which are based substantially on loan
production. Administrative and support personnel increased from 7 employees at
December 31, 1994 to 17 employees at December 31, 1995.
Interest expense increased by $225,000 or 1,118%, to $245,000 for the year
ended December 31, 1995 from $20,000 for the year ended December 31, 1994.
During the years ended December 31, 1994 and 1995, substantially all of the
Company's originations were funded directly by institutional investors at
closing (table funding).
Other operating expenses increased by $189,000, or 137%, to $327,000 for
the year ended December 31, 1995 from $138,000 for the year ended December 31,
1994. This increase in expenses was primarily attributable to the Company's
increased volume of loan originations during the year ended December 31, 1995.
Liquidity and Capital Resources
The Company's principal financing needs consist of funding its mortgage
loans and residential rehabilitation properties. To meet these needs, the
Company currently relies on borrowings under the Warehouse Facility, borrowings
from affiliates and cash flow from operations. At September 30, 1997, maximum
permitted borrowings under the Warehouse Facility were $70 million and the
amount of such outstanding borrowings was $55.9 million. The Warehouse Facility
is secured by the mortgage loans and residential rehabilitation properties
funded with the proceeds of such borrowings. Borrowings from affiliates are
secured by mortgages on the residential rehabilitation properties for which
monies were borrowed.
Under the Borrowing Agreement, the interest rate charged for borrowings is
LIBOR plus 2 1/4% on fixed loans and LIBOR plus 2% on adjustable rate
mortgages. The Borrowing Agreement expires on May 31, 1998 and is funded by two
commercial banks. The Borrowing Agreement 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 Borrowing Agreement when
its current term expires. See "Business -- Loan Funding and Borrowing
Arrangements."
26
<PAGE>
The Company's Borrowing Agreement with two commercial banks (PNC Mortgage
Bank and LaSalle National Bank) commenced in July 1997 and was amended on
September 30, 1997 to allow the Company to borrow up to $50 million to finance
its mortgage banking operations. The Borrowing Agreement was further amended to
allow the Company to borrow up to $60 million through February 17, 1998. These
borrowings are to be repaid with the proceeds received by the Company from the
sale of its originated loans to institutional investors or, in the case of
residential rehabilitation activities, from the proceeds from the sale of the
properties. The Borrowing Agreement requires the Company to comply with certain
financial covenants, including maintaining a minimum tangible net worth, levels
and ratios of indebtedness, restrictions on the sale or pledge of any future
retained servicing rights, restrictions on the payments of dividends and
distributions and provisions with respect to merger, sale of assets,
acquisitions, change of control and change in senior management. The Borrowing
Agreement contains a cross default provision in the event that the Company is
in default of other loan agreements whereby the Company owes, in the aggregate,
more than $100,000. In addition, borrowings 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. As of September 30, 1997, total
borrowings outstanding under the Borrowing Agreement were $35 million. The
Company's Borrowing Agreement with these two banks expires on May 31, 1998, and
is terminable by the banks at any time without cause, upon 60 days notice to
the Company.
From August 1996 through November 1997, one of the commercial banks that
provides the Borrowing Agreement supplemented this lending facility through the
Gestation Agreement, which for financial reporting is characterized by the
Company as a borrowing transaction. The Gestation Agreement provides the
Company with up to $20 million of additional funds for loan originations
through the Company's sale to this bank of originated mortgage loans previously
funded under the Borrowing Agreement and committed to be sold to institutional
investors. Under the Gestation Agreement, the Company is required to arrange
for institutional investors to take delivery of the loans within 20 days of
their sale to the bank; otherwise the Company is required to repurchase the
loans. As of September 30, 1997, total fundings under this Gestation Agreement
were $20 million. On November 15, 1997 the Gestation Agreement expired. The
bank providing the Gestation Agreement exited the business of providing
gestation lines of credit, but allowed the Company to continue to utilize the
line of credit until January 15, 1998. Since January 15, 1998, the Company has
been allowed to maintain the outstanding balance under the Gestation Agreement,
but the Company is not allowed to borrow any additional funds. The Company will
repay the amount outstanding under the Gestation Agreement in the ordinary
course of business. The Company believes that other financial institutions will
provide it with a gestation line of credit, but no assurance can be made that
the Company will find such financial institution or that the line of credit
will be available on reasonable terms or at all. See "Business -- Loan Funding
and Borrowing Arrangements."
Since September 1, 1996, the Company has borrowed funds from three
corporations owned by Ronald Friedman, the President, Chief Executive Officer
and a Director of the Company, and Robert Friedman, the Chairman of the Board
of Directors, Chief Operating Officer, Secretary and Treasurer of the Company,
to provide funding for residential rehabilitation properties and for working
capital purposes. At September 30, 1997 borrowings from affiliates totalled
$3.0 million. At December 31, 1996 borrowings from affiliates totalled
$762,000. Interest on borrowings from affiliates is 10% per annum and are
secured by certain of the Company's residential rehabilitation properties.
Following this Offering, the Company does not expect to borrow additional funds
from these affiliated entities, or any other entities owned or controlled,
either directly or indirectly, by Ronald Friedman or Robert Friedman. See
"Certain Transactions".
In November 1996, Ronald Friedman loaned the Company $275,000, evidenced
by a promissory note, due in full on January 1, 1998, bearing an interest rate
of 8% per year. In addition, the Company purchased the minority interest in RF
Properties Corp. from Ronald Friedman giving the Company full ownership
interest in RF Properties Corp. for $18,163, evidenced by a promissory note due
the earlier of October 1, 1998, or the date of the consummation of this
Offering, bearing an interest rate of 8% per year. These loans have been repaid
as of January 1, 1998. See "Certain Transactions."
The Company sells its loans to various institutional investors. The terms
of these purchase arrangements vary according to each investor's purchasing
requirements; however, the Company believes that the loss of any one or group
of such investors would not have a material adverse effect on the Company.
27
<PAGE>
The Company expects to increase its production of mortgage originations
through greater emphasis on B-C-D loans, expansion of wholesale operations and
expansion into new geographic markets. The Company believes that wholesale
lending represents a cost-effective means by which the Company may expand into,
and develop a presence in new market areas. See "Business." This anticipated
increase in production of mortgage originations is expected to be funded by
additional borrowings under the Warehouse Facility, increased capital resulting
from this Offering and funds provided from operations. To the extent that
additional borrowings under the Warehouse Facility are not available on
satisfactory terms, the Company will explore alternative means of financing,
including raising capital through additional offerings of securities. The net
proceeds of this Offering, together with the Company's existing capital
resources, including the funds from its Warehouse Facility, are expected to
enable the Company to fund its mortgage banking and residential rehabilitation
operations for a minimum of 12 months following completion of the Offering.
Recent Accounting Pronouncements -- SFAS 128, SFAS 129, SFAS 130 and SFAS 131
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." SFAS 128 is effective for periods ending after December
15, 1997 and establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock and common stock
equivalents. The statement simplifies the computations of EPS that were
previously found in APB Opinion No. 15 "Earnings Per Share" and replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if all common stock
equivalents were converted. This statement requires a reconciliation of the
numerator and denominator of the two EPS calculations and the restatement of
all prior period EPS data presented after adoption. The Company has not yet
determined the impact SFAS 128 will have on its financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure." SFAS 129 is effective for periods ending after December 15, 1997.
The Statement consolidates the disclosure requirements related to an entity's
capital structure that were previously contained in APB Opinions No. 10,
"Omnibus Opinion -- 1996," and No. 15 "Earnings Per Share," and Financial
Accounting Standards No. 47, "Disclosure of Long Term Obligations." The Company
has not yet determined the impact SFAS 129 will have on its financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income." SFAS 130 is effective
for years beginning after December 15, 1997 and requires 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
required 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 not yet determined the impact SFAS 130
will have on its financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The Company has not yet
determined the impact SFAS 131 will have on its financial statements.
Termination of S Corporation and Status of Income Taxes
Upon the effective date of the Offering, the Existing Stockholders,
pursuant to the terms of the Contribution Agreement, will contribute their
shares of capital stock of Premier to the Company in exchange for 2,500,000
shares of Common Stock, which will constitute all of the shares of Common Stock
outstanding prior to this Offering. Simultaneous with the Exchange, Premier
will cease to be treated as an S corporation.
As an S corporation, the Company's income, whether or not distributed, is
taxed at the shareholder level for federal and state tax purposes. As a result
of the Exchange, the Company and Premier, which will become
28
<PAGE>
a wholly-owned subsidiary of the Company, will be fully subject to federal and
state income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of deferred tax liability to be recorded as of the
date of termination of the S corporation status will depend upon timing
differences between tax and book accounting principally relating to the
recognition of income on the cash basis for tax purposes. The pro forma
provision for income taxes in the accompanying statements of operations shows
results as if the Company had always been fully subject to federal and state
taxes at an assumed rate of approximately 42%.
29
<PAGE>
BUSINESS
General
PMCC Financial Corp. is a specialty consumer financial services company
providing a broad array of residential mortgage products to customers ranging
from prime credit borrowers seeking "conventional" or FHA/VA loans to persons
who cannot so qualify, i.e., so-called "B," "C" and "D" or "sub-prime" credit
borrowers, seeking "non-conventional" loans. Since mid-1996, the Company has
expanded and diversified its mortgage banking activities by opening a
fully-staffed wholesale division, significantly increasing its "B," "C" and "D"
mortgage originations and establishing a program to provide short-term funding
to independent real estate agencies for one to four family residential
rehabilitation properties.
The Company's primary mortgage banking business objectives are to enhance
its growth, to continue to offer a full range of mortgage products to all types
of borrowers and to generate positive cash flow by selling substantially all
originated loans for cash to institutional investors, usually without recourse,
within a short period after such loans are originated, thereby reducing
exposure to interest rate and credit risks. For the year ended December 31,
1996 and for the nine months ended September 30, 1997, the Company has had less
than $50,000 of credit losses in each period from its mortgage banking
activities.
The Company has experienced significant growth in its mortgage banking
activities in recent years, originating $47 million in mortgage loans in 1994,
$71 million in mortgage loans in 1995, $133 million in mortgage loans in 1996
and $208 million in mortgage loans in the nine months ended September 30, 1997.
For the nine months ended September 30, 1997, sub-prime loans originated by the
Company accounted for 16% of its total mortgage originations. For its fiscal
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1997, the Company had revenues from its mortgage banking activities of $3.4
million, $6.8 million and $10.1 million, respectively.
The Company originates residential first mortgages in New York and New
Jersey by a staff of 31 experienced retail loan officers (as of September 30,
1997) who obtain customers through referrals from local real estate agents,
builders, accountants, financial planners and attorneys, as well as from direct
customer contact via advertising, direct mail and promotional materials. The
Company's wholesale division originates mortgage loans through independent
mortgage bankers and brokers, who submit applications to the Company on behalf
of a borrower. For the nine months ended September 30, 1997, approximately 67%
of the Company's mortgage originations were derived from its retail mortgage
operations and approximately 33% from its wholesale operations.
The Company's revenues from mortgage banking activities are primarily
generated from the premiums it receives on the sale of mortgage loans it
originates, and from interest earned during the period the Company holds
mortgage loans for sale. The Company's mortgage loans, together with servicing
rights to these mortgages, are usually sold on a non-recourse basis to
institutional investors, in each case within approximately seven to 30 days of
the date of origination of the mortgage. In general, when the Company
establishes an interest rate at the origination of a mortgage loan, it attempts
to contemporaneously lock in an interest yield to the institutional investor
purchasing that loan from the Company. By selling these mortgage loans, shortly
following origination, the Company limits its exposure to interest rate
fluctuations and credit risks. Furthermore, by selling its mortgage loans on a
"servicing-released" basis, the Company avoids the administrative and
collection expenses of managing and servicing a loan portfolio and it avoids a
risk of loss of anticipated future servicing revenue due to mortgage
prepayments in a declining interest rate environment.
The Company also generates income by charging fees for short-term funding
to independent real estate agencies for the purchase, rehabilitation and resale
of vacant one-to-four family residences in New York City and Long Island, New
York. The Company provides this funding to several independent real estate
agencies who specialize in the rehabilitation and marketing of these
properties. As security for providing the independent real estate agencies with
the funding to accomplish the purchase, rehabilitation and resale of the
property, title to the properties is held by the Company. The Company's income
from this activity is limited to the fees and interest charged in connection
with providing the funding and is not related to any gain or loss on the sale
of the property. Because the Company holds the title to these properties, for
financial reporting purposes the Company records as revenue the gross sales
price of these properties when the properties are sold to the ultimate
purchasers and it records cost of sales equal to the difference between such
gross sales price and the amount of its contracted income pursuant to its
contracts with the independent real estate agents. From the commencement of
this
30
<PAGE>
activity on September 1, 1996 through December 31, 1996, the Company completed
35 transactions and recorded revenues of $5.1 million and cost of sales of $4.8
million. At December 31, 1996, the Company had 43 properties in various stages
of rehabilitation and awaiting resale. During the nine months ended September
30, 1997, the Company completed 118 such transactions and at September 30,
1997, the Company had 140 properties in various stages of rehabilitation and
awaiting resale. The Company's revenues and costs of sales from this activity
for the nine months ended September 30, 1997 were $17.5 million and $16.5
million, respectively. Although the Company expects to continue this activity
in its markets, there can be no assurance that the Company's historical rate of
growth of this activity will continue in future periods. (See "Risk Factors --
Potential Losses Incurred from the Funding of the Purchase, Rehabilitation and
Resale of Residential Real Estate"; and "Possible Fluctuations in Quarterly
Performance").
The growth of the Company's mortgage lending to "B," "C" and "D" credit
borrowers reflects the establishment, in April 1997, of the Company's sub-prime
lending division with experienced personnel, increased customer demand for
sub-prime mortgage products and the availability of capital to the Company for
these mortgage banking products. In most cases, "B," "C" and "D" credit
borrowers have substantial equity in their residences and while some of these
sub-prime customers have impaired credit, such customers also include
individuals who seek an expedited mortgage process, and persons who are
self-employed or, due to other circumstances, have difficulty verifying their
income. The Company believes that the demand for loans by "B," "C" and "D"
credit customers is less dependent on general levels of interest rates or home
sales and therefore less cyclical than conventional mortgage lending. The
Company's sub-prime mortgage lending activity is subject to certain risks,
including risks related to the significant growth in the number of sub-prime
lenders in recent years, risks related to certain potential competition (see
"Risk Factors -- Competition"), and risks related to credit impaired borrowers
(see "Risk Factors -- Mortgage Lending to Sub-Prime Borrowers").
Growth Strategy
The Company's growth strategy includes the following elements:
o increase the Company's "B," "C" and "D" mortgage originations through
recruitment of experienced salespersons and acquisitions of mortgage
brokers or mortgage banks in the Northeast that specialize in mortgage
products for this target market. The Company believes that acquisitions of
mortgage brokers and bankers who specialize in sub-prime mortgage products
in particular local markets is a cost-effective way of reaching new
customers. The Company has no present plans, agreements or arrangements
with respect to any acquisition, but intends to pursue one or more of such
acquisitions within the 12 month period following the closing of the
Offering;
o increase the Company's wholesale mortgage origination business in New
York and expand into other states. The Company believes that its broad
range of mortgage alternatives for most classifications of borrowers and
its ability to promptly make decisions provides it with the opportunity to
increase this aspect of its business in the New York and New Jersey
markets and in other markets in to which it intends to expand. Prompt and
consistent service to independent mortgage loan brokers who are sources of
wholesale loan transactions is a key to the Company increasing its
wholesale mortgage originations and establishes the basis for repeat
business and referrals from these brokers;
o expand the Company's retail mortgage origination business into
Connecticut, Pennsylvania, Florida and Maryland. Over the next 12 months,
the Company intends to open at least four "retail" sales offices (i.e.,
offices intended to deal directly with potential borrowers) in these
states, although it has not yet identified the exact locations of these
additional offices. This expansion activity will be based on the Company's
ability to recruit experienced loan officers and other qualified personnel
in particular markets. The expansion costs for new sales offices are
generally mitigated by leasing short-term executive suite space until
revenues are generated by the office, at which time the Company will lease
permanent space. Controlling the costs of expansion permits the Company to
enter and, if necessary, exit new geographic markets quickly with limited
financial impact. The Company's goal is for each such office to achieve
break-even operations within six months after opening;
o expand the Company's residential rehabilitation activities outside of New
York City and Long Island, New York. The Company believes that
opportunities exist in other locations within New Jersey and the New York
metropolitan area to provide fee-based short-term funding for residential
rehabilitation properties. In some cases, this funding would be provided
to one of the specialized real estate companies with which
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<PAGE>
the Company already does business, while in other cases, the Company may
elect to work with companies with which it has not done business in the
past. The Company views its residential rehabilitation activities as
important sources of fee business and follow-on mortgage origination
business; and
o recruit additional key personnel. The Company continues to seek to hire
experienced mortgage loan and operations personnel, particularly with
experience in sub-prime mortgage originations. The Company views its
employees as key to its growth, and believes it offers compensation
packages that will both attract new employees and retain existing ones.
There can be no assurance as to the specific time-frame concerning when
the Company will implement any elements of its growth strategy, whether the
Company will be successful in implementing this strategy or whether the
implementation of this strategy will result in increased revenue or income to
the Company.
Operating Strategy
The Company's operating strategy includes the following elements:
o continue to provide quality service. The Company seeks to provide high
levels of service to its retail customers and the broker network that is a
source of wholesale loan originations. This service includes prompt
preliminary approval of loans, consistent application of the Company's
underwriting guidelines and prompt funding of loans. To provide this level
of service, each loan is handled by a team of professionals that includes
experienced loan sales personnel, processors and underwriters. The Company
believes that this commitment to service provides it with a competitive
advantage in establishing and maintaining a productive sales force and
satisfactory broker relationships;
o maintain underwriting standards. The Company's underwriting process is
designed to thoroughly, expeditiously and efficiently review and
underwrite each prospective loan and to insure that each such loan can be
sold to a third-party investor by conforming to its requirements. The
Company employs seven underwriters, with an average of twelve years of
relevant mortgage loan experience, to ensure that all originated loans
satisfy the Company's underwriting criteria. Each loan is reviewed and
approved by a senior underwriter. The Company believes that its
experienced underwriting staff provides it with the infrastructure
required to manage and sustain the Company's growth rate while maintaining
the quality of loans originated;
o broaden product offerings. The Company frequently reviews its pricing and
loan products relative to its competitors and introduces new loan products
in order to meet the needs of its customers who may be "retail" customers
and brokers who are sources of wholesale loan originations. The Company
successfully negotiates master commitments from its investors for special
niche products which are only offered to a limited number of companies
nationwide. The Company intends to continue to negotiate these specialized
master commitments to allow the Company to offer exceptional niche
products that are only offered to a limited amount of companies
nationwide;
o continue delegated underwriting approval status. The Company seeks to
provide a high level of service to its retail and wholesale accounts, by
having internal authority to approve a large portion of the loans it
sells. In addition to FNMA, FHLMC, FHA and jumbo loans, the Company has
been delegated authority by certain institutional investors to approve
many of the Company's niche products. The Company has provided training
for its processors and underwriters to efficiently review each file for
compliance with investor guidelines. The Company believes that its
delegated authority to approve most loans provides it with a competitive
advantage because it allows the Company to provide additional services to
its borrowers and correspondents; and
o invest in information systems. In its continued effort to increase
efficiency, the Company plans to upgrade its information systems in 1998.
The Company intends to continually look for ways to improve efficiencies
through automation.
The Company does not currently intend to engage in mortgage securitization
activities.
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Mortgage Products Offered
The Company believes it is one of a small group of multi-state mortgage
bankers that offer on a direct (or "retail") basis a broad array of mortgage
products to prime credit borrowers (i.e., a credit-rated borrower seeking a
conventional or FHA/VA insured loan), and borrowers who are unable to qualify
for conforming home mortgages (i.e., the "B," "C" and "D" credit-rated, or
sub-prime borrower). The Company's experience and expertise in numerous types
of mortgage products also gives it the ability to originate a full range of
mortgage products on a wholesale basis. This broad array of products allow most
prospective borrowers to obtain a mortgage through the Company.
The following are examples of the more than 200 mortgage programs offered
to prime credit and sub-prime credit borrowers:
o Fixed interest rate mortgages with a fixed monthly payment; this loan
is fully amortizing over a given number of years (for example, 15 or 30
years); a portion of the monthly payment covers both interest and
principal.
o Fixed interest rate balloon mortgages with equal monthly payments are
based on a long-term schedule (15 to 30 years), yet payment of the
outstanding balance is due in full at an earlier date (5 to 10 years).
o Adjustable interest rate mortgages ("ARMs") repayable over seven to 30
years with monthly payments adjusted on a periodic basis (i.e., six
months or once a year) based upon interest rate fluctuations.
ARMs offer additional alternatives:
o Adjustment period -- This determines when the first interest rate and
payment changes will take place; an ARM could make its initial
adjustments after six months, one year, three years, five years or ten
years and subsequent adjustments take place either every six months or
one year thereafter.
o Caps -- "Caps" place limits on payments and interest rate changes per
adjustment period. For example, for an ARM that adjusts every year, the
maximum increase in the interest rate on the adjustment date is
typically 200 basis point per year (i.e., a mortgage would adjust from
7% to 9%) and 600 basis points for the life of the loan.
o Index -- The index is the basis upon which interest rate adjustments
are made; typically it is related to various Treasury bill rates or
another widely published rate such as LIBOR.
Mortgages are also offered with a variety of combinations of interest
rates and origination fees so that its customers may elect to "buy-down" the
interest rate by paying higher points at the closing or pay a higher interest
rate and reduce or eliminate points payable at closing. The Company's mortgage
products are further tailored, i.e., are offered with varying down payment
requirements, loan-to-value ratios and interest rates, to a borrower's profile
based upon the borrower's particular credit classification and the borrower's
willingness or ability to meet varying income documentation standards -- the
full income documentation program pursuant to which a prospective borrower's
income is evaluated based on tax returns, W-2 forms and pay stubs; the limited
income documentation program pursuant to which a prospective borrower's income
is evaluated based on bank statements and profit and loss statements; the
stated income program pursuant to which a prospective borrower's employment,
rather than income, is verified; or the no ratio loan program pursuant to which
a prospective borrower's credit history and collateral values, rather than
income or employment, are verified. These loan variations give the Company the
flexibility to extend mortgages to a wider range of borrowers.
FHA/VA Mortgages. The Company has been designated by the U.S. Department
of Housing and Urban Development ("HUD") as a direct endorser of loans insured
by the Federal Housing Administration ("FHA") and as an automatic endorser of
loans partially guaranteed by the Veterans Administration ("VA"), allowing the
Company to offer so-called "FHA" or "VA" mortgages to qualified borrowers.
Generally speaking, FHA and VA mortgages are available to borrowers with
low/middle incomes and impaired credit classifications for properties within a
specific price range (generally less than $160,950 for one-family residences or
$205,912 for two-family residences located in the New York City metropolitan
area). FHA and VA mortgages must be underwritten within
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<PAGE>
specific governmental guidelines, which include income verification, borrower
asset, borrower credit worthiness, property value and property condition.
Because these guidelines require that borrowers seeking FHA or VA mortgages
submit more extensive documentation and the Company perform a more detailed
underwriting of the mortgage than prime credit mortgages, the Company's
origination fees for these mortgages are generally higher than a comparable
sized mortgage for a prime credit borrower.
Credit Classifications for Sub-Prime Borrowers
The Company has established credit classifications for sub-prime borrowers
"B+" through "D" -- including subratings within those categories -- based on
the credit profiles of the applicant and a credit scoring model. These
classifications are determined by factors that include the applicant's credit
history, the loan-to-value ratio, the applicant's employment status, the
applicant's income (and verification thereof), and the applicant's debt/income
ratio. The Company believes its classifications are generally consistent with
established industry-wide practices utilized by third-party investors to create
and maintain a substantial liquid secondary market for these mortgages. The
significance of these classifications is that mortgages for sub-prime borrowers
typically carry higher origination fees and higher interest charges than
conventional mortgages, and are, therefore, significantly more profitable to
the Company than conventional and/or FHA/VA mortgages.
The following table sets forth the Company's mortgage loan production
volume by type of loan for each of the three years ended December 31, 1996, and
for the nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Nine Months Ended September
Years Ended December 31, 30,
------------------------------------------ ----------------------------
($ in thousands) ($ in thousands)
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Volume .................... $ 46,700 $ 51,300 $ 75,400 $ 54,900 $ 122,400
Percentage of total volume 100% 72.6% 56.7% 56.8% 58.9%
FHA/VA Loans:
Volume .................... -- $ 19,400 $ 57,700 $ 41,800 $ 52,300
Percentage of total volume -- 27.4% 43.3% 43.2% 25.1%
Sub-Prime Loans:
Volume .................... * * * * $ 33,300
Percentage of total volume * * * * 16.0%
Total Loans:
Volume .................... $ 46,700 $ 70,700 $133,100 $ 96,700 $ 208,000
Number of Loans ........... 273 470 890 636 1,430
Average Loan Size ......... $ 171 $ 150 $ 150 $ 152 $ 145
</TABLE>
- ------------
*For the referenced periods, sub-prime loans represented less than five percent
of the Company's loan originations and are included in the Company's
conventional loans.
Operations
Markets. The Company currently services mortgage customers in New York
State (particularly in New York City and throughout Long Island) and New Jersey
through three offices. Additionally, the Company has mortgage banking licenses
in Connecticut and Florida. Within the next 12 months, the Company intends to
open four additional retail offices in New York, Pennsylvania and Maryland and
will open other retail offices as opportunities present themselves. These
offices will allow the Company to focus on developing contacts with individual
borrowers, local brokers and referral sources such as accountants, attorneys
and financial planners. The Company will seek to increase its wholesale
mortgage originations through its existing offices and by obtaining licenses in
approximately 10 additional states within the next year. The Company intends to
expand its residential rehabilitation activities through its existing and
future agency relations.
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<PAGE>
The Company also expects to expand into selected geographic markets
through acquisitions of mortgage banking/mortgage broker businesses that have
established niches in such areas. The Company believes these acquisitions are a
cost-effective strategy for increasing mortgage originations, and is
particularly interested in businesses in the Northeast and mid-Atlantic Region
that specialize in mortgage products for "B," "C" and "D" customers.
Retail Mortgage Originations. The Company's typical retail customer is
assigned to one of the Company's mortgage loan officers working at one of the
Company's offices who spends approximately one hour interviewing the applicant
about his/her mortgage borrowing needs and explaining the Company's mortgage
product alternatives. Following this interview, the mortgage loan officer
assists the customer in completing an application and gathering supporting
documentation (a "loan file"). Once the loan file is submitted, a sales manager
reviews the file to verify that the loan complies with a specific product that
the Company can resell to institutional investors. The Company assigns a loan
processor to review a loan file for completeness and requests missing
documentation from the borrower. The Company's review of a loan file and the
related underwriting process generally includes matters such as verification of
an applicant's sources of down payment, review of an applicant's credit report
from a credit reporting agency, receipt of a real estate appraisal,
verification of the accuracy of the applicant's income and other information,
and compliance with the Company's underwriting criteria and those of either FHA
and/or institutional investors. The Company's review/underwriting process
allows it to achieve efficiency and uniformity in processing, as well as
quality control over all loans. In the case of prime and FHA/VA mortgages, the
underwriting process occurs at the Company's offices in Roslyn Heights, New
York and Union, New Jersey, while sub-prime loans are separately processed and
underwritten at the Company's office in Roslyn Heights, New York.
When a loan reaches the underwriting department, the Company's goal is to
promptly evaluate the loan file to reach preliminary decisions within 24 to 48
hours of receipt. After a loan has been approved, the Company issues a written
loan commitment to the applicant which sets forth, among other things, the
principal amount of the loan, interest rate, origination and/or closing fees,
funding conditions and approval expiration dates.
Approved applicants have a choice of electing to "lock-in" their mortgage
interest rate as of the application date or thereafter or to accept a
"prevailing" interest rate. A "prevailing" interest rate is subject to change
in accordance with market interest rate fluctuations and is set by the Company
three to five days prior to closing. At the closing, a Company-retained
attorney or closing agent is responsible for completing the mortgage
transaction in accordance with applicable law and the Company's operating
procedures and completion of appropriate documentation.
As a "retail" mortgage originator, the Company performs all the tasks
required in the loan origination process, thereby eliminating any
intermediaries from the transaction. This permits the Company to maximize fee
income and to be a low cost provider of mortgage loans. This structure provides
the Company with a competitive advantage over mortgage brokers, who must
outsource a significant portion of the loan origination process, and over
banks, which usually have greater overhead expenses than the Company. In
addition, handling the entire loan origination process in-house leads to
effective quality control and better communication among the various personnel
involved.
Wholesale Mortgage Operations. Wholesale mortgage originations are the
responsibility of the Company's wholesale division, which solicits referrals of
borrowers from a network of approximately 125 independent mortgage bankers and
brokers located throughout New York and New Jersey. In wholesale originations,
these mortgage bankers and brokers deal directly with the borrowers by
assisting the borrower in collecting all necessary documents and information
for a complete loan application, and serving as a liaison to the borrower
throughout the lending process. The mortgage banker or broker submits this
fully processed loan application to the Company for underwriting determination.
The Company reviews the application of a wholesale originated mortgage
with the same underwriting standards and procedures used for retail loans,
issues a written commitment, and upon satisfaction of all lending conditions,
closes the mortgage with a Company-retained attorney or closing agent who is
responsible for completing the transaction as if it were a "retail" originated
loan. Mortgages originated from the wholesale division are sold to
institutional investors similar to those that purchase loans originated from
the Company's "retail" operation.
35
<PAGE>
Because mortgage brokers may submit individual loan files to several
prospective lenders simultaneously, the Company attempts to respond to an
application as quickly as possible. Since the Company has been delegated
authority from institutional investors to approve most loans, the Company
generally issues an underwriting decision within 24 to 48 hours of receipt of a
file.
The Company works with approximately 125 mortgage bankers and brokers on a
regular basis. The Company conducts due diligence on potential mortgage bankers
and brokers, including verifying financial statements of the company and credit
checks of principals, business references provided by the bankers or brokers
and verifying through the banking department that the mortgage banker or broker
is in good standing. Once approved, the Company requires that each mortgage
banker or broker sign an agreement of purchase and sale in which the mortgage
banker or broker makes representations and warranties governing both the
mechanics of doing business with the Company and the quality of the loan
submissions. In addition, the Company regularly reviews the performance of
loans originated through mortgage bankers and brokers.
Through the wholesale division, the Company can increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations because brokers conduct their own
marketing and employ their own personnel to attract customers, to assist the
borrower in completing the loan application and to maintain contact with
borrowers.
Residential Rehabilitation Activities. In September 1996, the Company
commenced a program of providing short-term fee-based funding to several real
estate agencies with specialized expertise in the acquisition, rehabilitation
and resale of vacant one-to-four family residential properties in New York City
and Long Island, New York. These properties are generally offered to the
agencies by banks or other mortgage companies that have acquired title and
possession through a foreclosure proceeding. The Company's process of providing
this short-term funding commences when an agency submits information about a
property to the Company which the agency believes meets the Company's
rehabilitation financing criteria. If the Company agrees to fund the
rehabilitation of the property, it will advance the purchase of the property at
up to 70% of the appraised value. The Company generally does not fund
properties when the purchase price of the property is greater than 70% of the
appraised value. As security for providing these independent real estate
agencies with the funding to accomplish the purchase, residential
rehabilitation and resale of the property, title to these properties is held by
the Company. The Company's income from this activity is limited to the fees and
interest charged in connection with providing the financing and not from any
gain or loss on the sale of the property. The terms of these financing
agreements with the agencies (the "Agent Agreement") provide that all risks
relating to the ownership, marketing and resale of the property are borne by
the agencies, including obtaining insurance on the property, maintaining the
property and arranging for all aspects of offering and selling the property to
potential buyers and renovating the property to the satisfaction of the buyer.
The Agent Agreements also provide that the Company's fee, which averages
approximately $9,500, is a priority payment after payment of the funds advanced
by the Company, over any monies paid to the agencies. The agencies and their
principals personally guaranty reimbursement of all costs and the total fee
payable to the Company. The properties funded by the Company through the
residential rehabilitation program are generally acquired at prices between
$60,000 and $100,000 each, and the renovation/rehabilitation expenses (which
are borne by the agencies) are usually between $10,000 and $20,000 per
property. The period during which these properties are financed generally
ranges from three to five months. Because the Company holds title to these
properties, for financial reporting purposes the Company records as revenue the
gross sales price of these properties when the properties are sold to the
ultimate purchasers and it records cost of sales equal to the difference
between such gross sales price and the amount of its contracted income pursuant
to its contracts with the independent real estate agents.
From inception of the program in September 1996 through September 30,
1997, the Company has completed 153 such residential rehabilitation
transactions with four different agencies. The Company funded 103 of these
properties for The Foreclosure Network and the remaining 50 with three other
agents. At September 30, 1997, the Company held 140 properties in various
stages of rehabilitation and resale in an aggregate amount of $12.4 million. At
September 30, 1997, 37 residential rehabilitation properties had not been sold
within five months of purchase, but were subsequently sold or under contract
for sale.
The Company's arrangement with these agencies is not exclusive, although
the Company does encourage the agencies to provide the Company with a "first
right" of funding each property that each agency has identified. The Company
has investigated each agency and is satisfied that their financial condition
and business repu-
36
<PAGE>
tation is acceptable. As the Company opens additional retail offices, it will
consider funding residential rehabilitation properties in the areas served by
such offices.
The Company believes that its residential rehabilitation program serves as
an additional source of mortgage originations since purchasers of such
properties seek mortgage financings and are encouraged to submit applications
to the Company. Of the 153 properties sold through September 30, 1997, more
than 90% of the buyers of such properties obtained mortgages originated by the
Company. The process by which these mortgages were processed and underwritten
was identical to the Company's procedures for reviewing and underwriting
mortgages originated from retail or wholesale sources, and each of these
mortgages was sold to third party investors in the normal course of the
Company's business.
Loan Funding and Borrowing Arrangements
To date, the Company has funded its mortgage banking and residential
rehabilitation financing activities in large part through the "Warehouse
Facility" and its ability to continue to originate mortgage loans and provide
residential rehabilitation financings is dependent on continued access to
capital on acceptable terms.
The Company's Borrowing Agreement with two commercial banks (PNC Mortgage
Bank and LaSalle National Bank) commenced in July 1997, and was amended on
September 30, 1997 to allow the Company to borrow up to $50 million to finance
its mortgage banking operations. The Borrowing Agreement was further amended to
allow the Company to borrow up to $60 million through February 17, 1998. These
borrowings are repaid with the proceeds received by the Company from the sale
of its originated loans to institutional investors or, in the case of
residential rehabilitation activities, from the proceeds from the sale of the
properties. The Company is required to comply with certain financial covenants
and the borrowings are guaranteed by Ronald Friedman the Company's President,
Chief Executive Officer and a director and Robert Friedman the Company's Chief
Operating Officer, Secretary Treasurer and Chairman of the Board of Directors.
As of September 30, 1997, total borrowings outstanding under the Borrowing
Agreement were $35 million. The Company's Borrowing Agreement with these two
banks expires on May 31, 1998, and is terminable by the banks at any time
without cause, upon 60 days notice to the Company.
The Borrowing Agreement requires the Company to repay the amount it
borrows to fund a loan generally within 60 to 90 days after the loan is closed
or when the Company receives payment from the sale of the funded loan,
whichever occurs first. Until the loan is sold to an investor and repayment of
the loan is made under the Borrowing Agreement, the Borrowing Agreement
provides that the funded loan is pledged to secure the Company's outstanding
borrowings. Interest payable on fixed loans is LIBOR plus 2 1/4% per year,
while interest payable on adjustable rate mortgages is LIBOR plus 2% per year.
From August 1996 through November 1997, one of the commercial banks that
provides the Borrowing Agreement supplemented this lending facility through the
Gestation Agreement, which for financial reporting is characterized by the
Company as a borrowing transaction. The Gestation Agreement provides the
Company with up to $20 million of additional funds for loan originations
through the Company's sale to this bank of originated mortgage loans previously
funded under the Borrowing Agreement and committed to be sold to institutional
investors. Under the Gestation Agreement, the Company is required to arrange
for institutional investors to take delivery of the loans within 20 days of
their sale to the bank; otherwise the Company is required to repurchase the
loans. As of September 30, 1997, total fundings under this Gestation Agreement
were $20 million. On November 15, 1997 the Gestation Agreement expired. The
bank providing the Gestation Agreement exited the business of providing
gestation lines of credit, but has allowed the Company to continue to utilize
the line of credit until January 15, 1998. Since January 15, 1998, the Company
has been allowed to maintain the outstanding balance under the Gestation
Agreement, but the Company is not allowed to borrow any additional funds. The
Company will repay the amount outstanding under the Gestation Agreement in the
ordinary course of business. The Company believes that other financial
institutions will provide it with a gestation line of credit, but no assurance
can be made that the Company will find such financial institution or that the
line of credit will be available on reasonable terms or at all.
From time to time, the Company has borrowed from three affilated
corporations owned by Ronald Friedman and Robert Friedman. The maximum
borrowings from these affiliates were approximately $3.0 million. As of
September 30, 1997, $3.0 million remained outstanding, all of which is secured
by a mortgage against the residential properties in rehabilitation pursuant to
a mortgage agreement. As the residential property is sold, the
37
<PAGE>
proceeds are used to repay the mortgage on the particular property. Interest
payable pursuant to this agreement is 10% per year.
In November 1996, Ronald Friedman loaned the Company $275,000, evidenced
by a promissory note, due in full on January 1, 1998, bearing an interest rate
of 8% per year. In addition, the Company purchased the minority interest in RF
Properties Corp. from Ronald Friedman for $18,163, evidenced by a promissory
note due the earlier of October 1, 1998 or the date of the consummation of this
Offering. The note bears an interest rate of 8% per year. These loans have been
repaid as of January 1, 1998. See "Certain Transactions."
Sale of Loans
The Company follows a strategy of selling all of its originated loans for
cash to institutional investors, usually on a non-recourse basis. This strategy
allows the Company to (i) generate near-term cash revenues, (ii) limit the
Company's exposure to interest rate fluctuations and (iii) substantially reduce
any potential expense or loss in the event the loan goes into default after the
first month of its origination. The non-recourse nature of the majority of the
Company's loan sales do not, however, entirely eliminate the Company's default
risk since the Company may be required to repurchase a loan from the investor
or indemnify an investor if the borrower fails to make its first mortgage
payment or if the loan goes into default and the Company is found to be
negligent in uncovering fraud in connection with the loan origination process.
At September 30, 1997, the Company had a reserve of approximately $70,000
against this potential liability.
The Company's mortgage loan sales are made to a select number of
institutional investors. From June 1997 through September 30, 1997, the Company
had an agreement with IMC to sell up to $32 million of "B," "C" and "D" loans
which assured the Company's sale of these loans in bulk, at favorable prices.
Although the Company's agreement with IMC expired on September 30, 1997, IMC
continues to purchase loans from the Company. During 1996 and 1997, the Company
sold substantially all of its prime and FHA/VA loans to three other
institutional investors. The Company, consistent with industry custom, has,
from time to time, made arrangements with these and other institutional
investors that allow the Company to sell mortgage loans at favorable prices if
targeted loan volumes are achieved.
Quality Control
In accordance with HUD regulations, the Company is required to perform
quality control reviews of its FHA mortgage originations. These quality control
procedures are performed by an independent contractor who delivers its quality
control reports to the Company's management on a monthly basis. The quality
control process examines branch offices and approximately 10% of all mortgage
originations for compliance with federal and state lending standards, which may
involve reverifying employment and bank information and obtaining separate
credit reports and property appraisals.
Marketing and Sales
The Company has developed numerous marketing programs at both the
corporate and the branch office level. These programs include, among others,
market-sensitive advertising in key newspapers and other publications, public
relations, promotional materials customized for consumers and real estate
professionals, collateral materials supporting particular product promotions,
educational seminars, trade shows, telemarketing, and sponsoring or promoting
other special events. The Company also conducts seminars in conjunction with
other real estate professionals targeting potential home buyers. The Company is
active with local boards of realtors, Better Business Bureaus and the Builders
Association of America. All of the Company's loan representatives support these
activities with extensive personal contact.
Competition
The mortgage banking industry is highly competitive in the states where
the Company conducts business and in the states into which it seeks to expand.
The Company's competitors include financial institutions, such as other
mortgage bankers (e.g. Countrywide Credit Industries, Inc. and Delta Financial
Corp.), state and national
38
<PAGE>
commercial banks, savings and loan associations (e.g. Long Island Savings Bank
and Dime Savings Bank), credit unions, insurance companies and other finance
companies. Many of these competitors are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company.
Competition in the mortgage banking industry is based on many factors,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan and interest rates. The
Company believes that its competitive strengths include providing prompt,
responsive service and flexible underwriting to independent mortgage bankers
and brokers. The Company's underwriters apply its underwriting guidelines on an
individual basis but have the flexibility to deviate from such guidelines when
an exception or upgrade is warranted by a particular loan applicant's
situation, such as evidence of a strong mortgage repayment history relative to
a weaker overall consumer-credit repayment history. This provides independent
mortgage bankers and brokers working with the Company the ability to offer loan
programs to a diversified class of borrowers.
Since there are significant costs involved in establishing retail mortgage
offices, there may be potential barriers to market entry for any company
seeking to provide a full range of mortgage banking services. No single lender
or group of lenders has, on a national level, achieved a dominant or even a
significant share of the market with respect to loan originations for first
mortgages.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service and offering competitive loan programs to
borrowers.
Information Systems
The Company continues to design and integrate into its operations the
ability to access critical information for management on a timely basis. The
Company uses various software programs designed specifically for the mortgage
lending industry. Each branch office provides headquarters and senior
management with productivity and other key data. The information system
provides weekly and monthly detailed information on loans in process, fees,
commissions, closings, detailed monthly financial statements and all other
aspects of running and managing the business. The Company anticipates using a
portion of the estimated net proceeds of this Offering for upgrades and
improvements to its information system. The cost of doing so is estimated to be
$1 million, including software, hardware and telephone equipment for all
locations. See "Use of Proceeds."
Regulation
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations and credit activities. In
addition, these rules limit the interest rates, finance charges and other fees
the Company may assess, mandate extensive disclosure to the Company's
customers, prohibit discrimination and impose qualification and licensing
obligations on the Company. The Company's loan origination activities are
subject to the laws and regulations in each of the states in which those
activities are conducted. The Company's lending activities are also subject to
various federal laws, including the Federal Truth-in-Lending Act and Regulation
Z promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
federal and state statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to loss of approved status by the banking
regulators of the various state governments where the Company operates, demands
for indemnification or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions by federal and state governmental agencies.
39
<PAGE>
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance
substantially more difficult or expensive. In the event that the Company is
unable to comply with such laws or regulations, its business, prospects,
financial condition and results of operations may be materially adversely
affected.
Members of Congress, government officials and political candidates have
from time to time suggested the elimination of the mortgage interest deduction
for federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantage of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for mortgage loans of the kind offered by the Company.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes, which sales
typically peak during the spring and summer seasons and decline from January
through March. Refinancings tend to be less seasonal and more closely related
to changes in interest rates.
Environmental Matters
In the course of its business, the Company takes title (for security
purposes) to residential properties intended for near term rehabilitation and
resale. Additionally, the Company may foreclosue on properties securing its
mortgage loans. To date the Company has not been required to perform any
investigation or remediation activities, nor has it been subject to any
environmental claims relating to these activities. There can be no assurance,
however, that this will remain the case in the future. Although the Company
believes that the risk of an environmental claim arising from its ownership of
a residential property (whether through residential rehabilitation financing or
through foreclosure) is immaterial, the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
a property, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and clean up costs
incurred by such parties in connection with the contamination, which costs may
be substantial. In addition, the Company, as the owner or former owner of a
contaminated site, may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
such property.
Employees
As of September 30, 1997, the Company had 83 employees, substantially all
of whom were employed full-time. Of these, 60 were employed at the Company's
Roslyn Heights, New York headquarters, and 23 were employed at the Company's
other offices. None of the Company's employees are represented by a union. The
Company considers its relations with its employees to be satisfactory.
Properties
The Company's executive and administrative offices are located at 66
Powerhouse Road, Roslyn Heights, New York, where the Company leases
approximately 6,395 square feet of office space at an annual rent of
approximately $150,000. The lease expires in August 2000.
The Company leases 1,562 square feet of general office space in Hauppauge,
New York pursuant to a lease that expires on December 31, 1999 at an average
annual rent of approximately $19,000. The Company leases office space in Union,
New Jersey pursuant to a lease that expires on February 28, 2002 with annual
rent of $61,762.50. The Company also leases 1,670 square feet of office space
in Roslyn Heights, New York pursuant to a lease that expires on January 31,
1998 with annual rent payments of $40,500.
40
<PAGE>
Legal Proceedings
In the ordinary course of its business, the Company is from time to time
subject to various legal proceedings. The Company does not believe that any
routine legal proceedings, individually or in the aggregate, will have a
material adverse affect on the operations or financial condition of the
Company.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of the Company's
directors and persons nominated to become directors and executive officers and
the positions they hold with the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- --------------------------------------------
<S> <C> <C>
Ronald Friedman (1) ........... 33 President and Chief Executive
Officer and Director
Robert Friedman (1) ........... 59 Chairman of the Board of Directors, Chief
Operating Officer, Secretary, and Treasurer
Timothy J. Mayette ............ 37 Chief Financial Officer
Keith S. Haffner .............. 50 Executive Vice President
Joel L. Gold (2) .............. 56 Nominee for Director
Stanley Kreitman (2) .......... 66 Nominee for Director
</TABLE>
- ------------
(1) Ronald Friedman is the son of Robert Friedman
(2) Member of Audit Committee
Ronald Friedman has been the President and Chief Executive Officer and a
Director of the Company since its inception. From 1989 through 1991, Ronald
Friedman was senior mortgage consultant at ICI Mortgage Corporation. From 1987
through 1989, Ronald Friedman was a senior accountant at Touche Ross & Co., an
accounting firm. Ronald Friedman received a B.A. in Accounting from The George
Washington University. Ronald Friedman has been a certified public accountant
since 1989.
Robert Friedman has been the Chairman of the Board of Directors, Chief
Operating Officer, Secretary and Treasurer of the Company since its inception.
Robert Friedman was also the Company's Chief Financial Officer until October
1997. Prior to forming the Company, Robert Friedman was senior partner
specializing in real estate and mortgages at Bernstein & Friedman, P.C., an
accounting firm. Robert Friedman received his BBA in accounting from the City
College of New York in 1963. Robert Friedman has been a certified public
accountant since 1964.
Timothy J. Mayette joined the Company in October 1997 as the Company's
Chief Financial Officer. Prior to joining the Company, Mr. Mayette was Chief
Financial Officer at Mortgage Plus Equity and Loan Holdings Corp. from
September 1996 through October 1997 and Vice President and Controller of
BankAmerica Mortgage Corporation (formerly Arbor National Holdings, Inc.) from
August 1991 through September 1996. Mr. Mayette received an MBA degree from
Hofstra University in 1989 and is a certified public accountant.
Keith S. Haffner has been the Executive Vice President of the Company
since 1996. From 1994 through 1995, Mr. Haffner was Executive Vice President of
Exchange Mortgage Corp., a mortgage banking company. From 1986 through 1994,
Mr. Haffner was Senior Vice President of Mortgage Production Administration at
Midcoast Mortgage Corp. Prior to 1986, Mr. Haffner was employed at various
positions with the Mortgage Bankers Association and with the Department of
Housing and Urban Development. Mr. Haffner received his B.A. in Political
Science in 1969 and a Masters in Public Administration in Urban Studies and
Real Estate Finance in 1972 from American University.
Joel L. Gold has been nominated to become a Director of the Company
following the closing of this Offering. In September 1997, Mr. Gold became Vice
Chairman of Coleman and Company Securities, Inc. From April 1996 through
September 1997, Mr. Gold was Executive Vice President and head of investment
banking at L.T. Lawrence Co., an investment banking firm. From April 1995 to
April 1996, Mr. Gold was a managing director and head of investment banking at
Fechtor & Detwiler. From 1993 to 1995, Mr. Gold was a managing director at
Furman Selz Incorporated, an investment banking firm. Prior to joining Furman
Selz, from 1991 to 1993, Mr. Gold was a managing director at Bear Stearns &
Co., an investment banking firm. Previously, Mr.
42
<PAGE>
Gold was a managing director at Drexel Burnham Lambert for nineteen years. He
is currently a member of the Board of Directors of Concord Camera, Sterling
Vision, Inc., Life Medical Sciences and BCAM International, Inc. Mr. Gold has a
law degree from New York University and an MBA from Columbia Business School.
Stanley Kreitman has been nominated to become a Director of the Company
following the closing of the Offering. Since March 1994, Mr. Kreitman has been
Vice Chairman at Manhattan Associates, a merchant banking firm. From September
1975 through February 1994, Mr. Kreitman was President of United States
Bancnote Corporation. Mr. Kreitman is Chairman of the Board of Trustees of New
York Institute of Technology. He is currently a member of the Board of
Directors of Porta Systems Corp., Medallion Funding Corp., and CCA Industries,
Inc.
Board of Directors
The Board of Directors currently consists of two members. There are two
vacancies on the Board. Upon completion of this Offering, the Company expects
to appoint Joel L. Gold and Stanley Kreitman as directors to its Board of
Directors.
The Company's Board of Directors is divided into three classes with each
class consisting of, as nearly as may be possible, one-third of the total
number of directors constituting the entire Board. The Company's Board of
Directors presently consists of two members with one member in Class II and one
member in Class III. Class III consists of Ronald Friedman, whose term will
expire at the 2000 annual meeting of stockholders: and Class II consists of
Robert Friedman, whose term will expire at the 1999 annual meeting of
stockholders. There are currently no directors in Class I, but, upon their
appointment upon completion of the Offering, Class I will consist of Joel L.
Gold and Stanley Kreitman, whose terms will expire at the 1998 annual meeting
of stockholders. After the initial term, each Class is elected for a term of
three years. At each annual meeting, directors are elected to succeed those in
the Class whose term expires at that annual meeting, such newly elected
directors to hold office until the third succeeding annual meeting and the
election and qualification of their respective successors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Board Committees
Upon completion of this Offering, the Board of Directors will establish an
Audit Committee. The Audit Committee will make annual recommendations to the
Board of Directors concerning the appointment of the independent public
accountants of the Company and will review the results and scope of the audit
and other services provided by the Company's independent auditors. The Audit
Committee will be comprised of Joel L. Gold and Stanley Kreitman.
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. It is expected that directors who
are not employees of the Company will receive options to purchase 5,000 shares
of Common Stock for each year served on the Board and reimbursement of expenses
incurred in connection with attending such meetings.
43
<PAGE>
Executive Compensation
The following table shows all the cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during the
fiscal years indicated, to the Chief Executive Officer ("CEO") and the most
highly compensated executive officers whose aggregate cash compensation
exceeded $100,000 during the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------- Other Annual
Name and Principal Position Year Salary ($) Bonus ($) Compensation
- -------------------------------------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Ronald Friedman ...................... 1997 $223,855 -- --
Chief Executive Officer, 1996 $208,000 $46,538 --
President, Director 1995 $126,800 -- --
Robert Friedman ...................... 1997 $165,475 -- --
Chairman of the Board, Chief Operating 1996 $107,093 -- --
Officer, Secretary, Treasurer 1995 -- -- --
Keith Haffner ........................ 1997 $126,811 51,000 --
Executive Vice President 1996 -- -- --
1995 -- --
</TABLE>
Distributions of Interest
During each of the years ended December 31, 1994, 1995 and 1996 and for
the nine months ended September 30, 1997, Premier has made S corporation
distributions to the Existing Stockholders in the aggregate amounts of
$102,000, $150,000, $267,000 and $365,000, respectively. Prior to the Exchange,
Premier will declare a distribution to the Existing Stockholders in an amount
equal to a portion of its undistributed S corporation earnings that will result
in the Company's shareholders equity equaling $1.7 million at the date of the
Offering. As of September 30, 1997, such distribution is currently estimated to
be approximately $1.4 million.
Employment Agreements
The Company will enter into employment agreements effective upon the
consummation of the Offering with Ronald Friedman and Robert Friedman. Each of
the employment agreements expire on December 31, 1999, unless sooner terminated
for death, physical or mental incapacity or cause (which is defined as the
uncured refusal to perform, or habitual neglect of, the performance of his
duties, willful misconduct, dishonesty or breach of trust which causes the
Company to suffer any loss, fine, civil penalty, judgment, claim, damage or
expense, a material breach of the employment agreement, or a felony
conviction), or terminated by either party with thirty (30) days' written
notice, and are automatically renewed for consecutive terms, unless cancelled
at least one year prior to expiration of the existing term. Each Employment
Agreement provides that all of such executive's business time be devoted to the
Company. In addition, each of the Employment Agreements also contain: (i) non-
competition provisions that preclude each employee from competing with the
Company for a period of two years from the date of the termination of his
employment with the Company; (ii) non-disclosure and confidentiality provisions
that all confidential information developed or made known during the term of
employment shall be exclusive property of the Company; and (iii)
non-interference provisions whereby, for a period of two years after his
termination of employment with the Company, the executive shall not interfere
with the Company's relationship with its customers or employees.
The employment agreements include compensation plans for fiscal year 1998
whereby Ronald Friedman and Robert Friedman will each receive a salary of
$250,000, and cash bonuses, if any, as determined by the Board of Directors in
its discretion.
Key Man Life Insurance
The Company owns, maintains and is the sole beneficiary of key man term
life insurance policies on the lives of Ronald Friedman and Robert Friedman in
the amounts of $3,000,000 and $750,000, respectively, on which the Company is
named as beneficiary.
44
<PAGE>
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation of the Company (the "Certificate")
provides that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (iii) for liability under
Section 174 of the Delaware General Corporation Law (relating to certain
unlawful dividends, stock repurchases or stock redemptions); or (iv) for any
transaction from which the director derived any improper personal benefit. The
effect of this provision in the Certificate is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in certain limited situations.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Company's By-Laws provide that the Company shall indemnify each
director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time to the fullest extent provided
by the laws of the State of Delaware.
Premier Stock Option Plan
On April 1, 1997, the stockholders of Premier approved the Premier Plan.
In connection with the Premier Plan, 375,000 shares (as adjusted) of Common
Stock are reserved for issuance pursuant to options that have been granted
under such plan through March 30, 2007. To date, no options have been
exercised. The options vest over a three year period following the date of the
grant.
The purpose of the Premier Plan is to encourage stock ownership by
employees of the Company, its divisions and subsidiary corporations and to give
them a greater personal interest in the success of the Company. The Premier
Plan is administered by the Board of Directors. The Board of Directors has the
authority, in its discretion, subject to and not inconsistent with the express
provisions of the Premier Plan, to administer the Premier Plan and to exercise
all the powers and authorities either specifically granted to it under the
Premier Plan or necessary or advisable in the administration of the Premier
Plan, including, without limitation, the authority to grant options; to
determine which options shall constitute incentive stock options ("ISO") and
which options shall constitute non-qualified stock options; to determine which
options (if any) shall be accompanied by rights or limited rights; to determine
the purchase price of the shares of Common Stock covered by each Option (the
"Option Price"); to determine the persons to who, and the time or times at
which, options shall be granted; to determine the number of shares to be
covered by each option; to interpret the Premier Plan; to prescribe, amend and
rescind rules and regulations relating to the Premier Plan; and to make all
other determinations deemed necessary or advisable for the administration of
the Premier Plan. The Board of Directors may delegate to one or more of its
members or to one or more agents such administrative duties as it may deem
advisable, and the Board of Directors or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with
respect to any responsibility the Board of Directors or such person may have
under the Premier Plan.
Options granted under the Premier Plan may not be granted at a price less
than the fair market value of the Common Stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares for which ISOs
granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Options granted under the Premier
Plan will expire not more than ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10% or more of the voting stock of
the Company). Options granted under the Premier Plan are not transferable
during an optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution.
After the Exchange, the Premier Plan will be converted to a plan to be
adopted by the Company's shareholders. After the Exchange there will be options
to purchase 375,000 shares of the Company's Common Stock outstanding at an
exercise price of $6.00.
45
<PAGE>
1997 Stock Option Plan
In October , 1997, the Board of Directors of the Company adopted, and the
stockholders approved, the 1997 Plan. The 1997 Plan has 375,000 shares of
Common Stock reserved for issuance upon the exercise of options designated as
either (i) an ISO or (ii) non-qualified options. ISOs may be granted under the
1997 Plan to employees and officers of the Company. Non-qualified options may
be granted to consultants, directors (whether or not they are employees),
employees or officers of the Company.
The purpose of the 1997 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and to give them a greater personal
interest in the success of the Company. The 1997 Plan is administered by the
Board of Directors. The Board of Directors, within the limitations of the 1997
Plan, determines, with the approval of the Chief Executive Officer of the
Company, the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the option purchase price per share, the manner and time of exercise, the
manner and form of payment upon exercise of an option, and restrictions such as
repurchase rights or obligations of the Company. Options granted under the 1997
Plan may not be granted at a price less than the fair market value of the
Common Stock on the date of grant (or 110% of fair market value in the case of
persons holding 10% or more of the voting stock of the Company). The aggregate
fair market value of shares for which ISOs granted to any employee are
exercisable for the first time by such employee during any calendar year (under
all stock option plans of the Company and any related corporation) may not
exceed $100,000. Options granted under the 1997 Plan will expire not more than
ten years from the date of grant (five years in the case of ISOs granted to
persons holding 10% or more of the voting stock of the Company). Options
granted under the 1997 Plan are generally not transferable during an optionee's
lifetime but are transferable at death by will or by the laws of descent and
distribution.
As of the date of this Prospectus, the Company has not granted any options
to purchase shares of Common Stock under the 1997 Plan.
Options
To date, options have not been granted to either Ronald Friedman or Robert
Friedman.
To date, options to purchase an aggregate of 375,000 shares at an exercise
price of $6.00 per share have been granted to employees under the Premier Plan
and no options have been granted to employees under the 1997 Plan. To date no
options have been exercised.
The following table sets forth certain information with respect to
individual grants of stock options made to date to the named executive officers
and directors:
<PAGE>
Option Grants
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Date Options Exercise Expiration Appreciation for
Name Granted Granted(1) Price Date Option Terms(2)
- ---------------------------- --------- ------------ ---------- ------------ -------------------------
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Ronald Friedman ............ -- -- -- -- -- --
Robert Friedman ............ -- -- -- -- -- --
Timothy J. Mayette ......... -- -- -- -- -- --
Keith Haffner .............. 4/1/97 31,250 $ 6.00 3/30/07 $117,918 $298,827
</TABLE>
- ------------
(1) Each option is exercisable for one share of Common Stock.
(2) The potential realizable value set forth under the columns represent the
difference between the stated option exercise price and the market value
of the Common Stock based on certain assumed rates of stock price
appreciation from the initial public offering price of $9.00 per share and
assuming that the options were exercised on their stated expiration date;
the potential realizable values set forth do not take into account
applicable tax and expense payments which may be associated with such
option exercises. Actual realizable value, if any, will be dependent on
the future price of the Common Stock on the actual date of exercise, which
may be earlier than the stated expiration date. The 5% and 10% assumed
annualized rates of stock price appreciation over the exercise period of
the options used in the table above are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Common Stock on any
date. There is no representation either express or implied that the stock
price appreciation rates for the Common Stock assumed for purposes of this
table will actually be achieved.
46
<PAGE>
CERTAIN TRANSACTIONS
Certain Relationships
Ronald Friedman, President, Chief Executive Officer, and a Director of the
Company, is the son of Robert Friedman, Chairman of the Board of Directors,
Chief Operating Officer, Secretary and Treasurer.
Reorganization and Termination of S Corporation Status
From January 1992 through the date of this Prospectus, Premier was treated
for federal income tax purposes as an S corporation, and was treated as an S
corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, Premier's historical earnings since January
1, 1992 have been taxed directly to Premier's stockholders at their individual
federal and state income tax rates, rather than to Premier. On the date of the
Exchange, pursuant to the terms of a contribution agreement (the "Contribution
Agreement"), the existing Premier stockholders, Ronald Friedman and Robert
Friedman (the "Existing Stockholders"), will contribute all of the shares of
capital stock of Premier that they beneficially own or otherwise control to the
Company in exchange for an aggregate 2,500,000 shares of Common Stock, which
constitutes all of the stock of the Company outstanding prior to this Offering.
As a result of the Exchange, the Company and Premier, which will be a wholly
owned subsidiary of the Company, will be fully subject to federal and state
income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of
the date of termination of Premier's S corporation status will depend upon
timing differences between tax and book accounting. During each of the years
ended December 31, 1994, 1995 and 1996 and for the nine months ended September
30, 1997, Premier has made S corporation distributions to the Existing
Stockholders in the amounts of approximately $102,000, $150,000, $267,000 and
$365,000, respectively.
Prior to the Exchange, Premier will declare a distribution to its Existing
Stockholders in an amount equal to a portion of its undistributed S corporation
earnings. As of September 30, 1997, such amount is currently estimated to be
approximately $1.4 million. Such distribution will be payable as follows: (i)
immediately prior to this Offering, approximately $1 million will be payable,
all of which is intended to reimburse such Existing Stockholders for, or
otherwise satisfy, tax liabilities associated with S corporation earnings; and
(ii) S-Notes in the aggregate principal amount of $400,000, bearing an interest
rate of 10% per annum, payable in four equal quarterly installments of
principal and interest, with the final payment due within one year of the date
of this Prospectus.
Prior to the Exchange, the Company, Premier and the Existing Stockholders
entered into a tax indemnification agreement (the "Tax Agreement") relating to
their respective income tax liabilities. Because the Company will be fully
subject to corporate income taxation after the termination of the Company's S
corporation status, the reallocation of income and deduction between the period
during which the Company was treated as an S corporation and the period during
which Premier and the Company will be subject to corporate income taxation may
increase the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreement is intended to assure that taxes are
borne by the Company on the one hand and the Existing Stockholders on the other
only to the extent that such parties received the related income. The Tax
Agreement generally provides that, if an adjustment is made to the taxable
income of Premier and the Company for a year in which it was treated as an S
corporation, the Company will indemnify the Existing Stockholders, and the
Existing Stockholders will indemnify the Company, against any increase in the
indemnified party's income tax liability (including interest, penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. Moreover, the Tax Agreement specifically
provides that the Existing Stockholders will not be responsible for any
portion of any deferred tax liability recorded on the balance sheet of the
Company upon termination of the S corporation status. The Company will also
indemnify the Existing Stockholders for all taxes imposed upon them as a result
of their receipt of an indemnification payment under the Tax Agreement. The Tax
Agreement is not binding on the Internal Revenue Service or state taxing
authorities and the IRS may assert a claim against the Existing Stockholders
and/or the Company. Any payment made by the Company to the Existing
Stockholders pursuant to the Tax Agreement may be considered by the Internal
Revenue Service or state taxing authorities to be non-deductible by the Company
for income tax purposes. Neither parties' obligations under the Tax Agreement
are secured, and, as such, there can be no assurance that the Existing
Stockholders or the Company will have funds available to make any payments
which may become due under the Tax Agreement.
47
<PAGE>
Loans from Affiliates
From time to time, the Company has borrowed from three affilated
corporations owned by Ronald Friedman and Robert Friedman. The maximum
borrowings from these affiliates were approximately $3 million. As of September
30, 1997, $3 million remained outstanding, all of which is secured by mortgages
against the residential properties in rehabilitation pursuant to a mortgage
agreement. As the residential property is sold, the proceeds are used to repay
the mortgage on the particular property. Interest payable pursuant to this
agreement is 10% per year.
In November 1996, Ronald Friedman loaned the Company $275,000, evidenced
by a promissory note, due in full on January 1, 1998. In addition, the Company
purchased the minority interest in RF Properties Corp. from Ronald Friedman for
$18,163, evidenced by a promissory note due the earlier of October 1, 1998 or
the date of the consummation of this Offering. The note bears an interest rate
of 8% per year. These loans have been repaid as of January 1, 1998.
Stockholders Agreement
Prior to the effective date of this Offering, the Company will enter into
a stockholders agreement with Ronald Friedman and Robert Friedman. The
stockholders agreement will provide that each of Ronald Friedman and Robert
Friedman will vote their shares of Common Stock in favor of the other, with
respect to their election to the Board of Directors. The stockholders agreement
will also provide for the disposition and transfer of shares. In general, the
stockholders agreement provides that all transferees, with the exception of a
bona fide sale to a third party at fair market value, either by the
registration of those shares or by an exemption from registration, will be
bound by the stockholders agreement.
Indemnity Agreement
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director and executive officer of the
Company (the "Indemnitees"). The Indemnity Agreements provide that the Company
will indemnify each Indemnitee to the fullest extent authorized or permitted by
law against payment of, and liability for, any and all expenses actually and
reasonably incurred by the Indemnitee, including, but not limited to,
judgments, fines, settlements and charges, costs, expenses of investigation and
expenses of defense of legal actions, suits or proceedings payable by reason of
the fact that the Indemnitee is or was a director and/or officer of the Company
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, in connection with the defense or settlement of such
proceedings, provided it is determined that the Indemnitee acted in good faith
and in a manner that he reasonably believed to be in or not opposed to the best
interests of the Company and, in the case of a criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. The Indemnity
Agreements also provide that all costs and expenses incurred by the Indemnitee
in defending or investigating such claim shall be paid by the Company (and
shall be paid by the Company in advance of the final disposition thereof at the
written request of the Indemnitee if the Indemnitee undertakes to repay the
Company for any costs or expenses so advanced if it shall ultimately be
determined by a court of competent jurisdiction in a final non-appealable
adjudication that he is not entitled to indemnification under the Indemnity
Agreement) unless the Company, independent legal counsel or the stockholders of
the Company determine that: (i) the Indemnitee did not act in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company; (ii) in the case of any criminal action or
proceeding, the Indemnitee had reasonable cause to believe his conduct was
unlawful; or (iii) the Indemnitee intentionally breached his duty to the
Company or its stockholders.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common
Stock as of the date of the Prospectus, and as adjusted to reflect the sale of
1,250,000 shares of Common Stock offered hereby, of (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock immediately prior to the Offering; (ii) each director and nominee
director of the Company; (iii) each executive officer of the Company; and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Beneficially Number of Shares Beneficially
Owned Prior to Offering (1) Owned After the Offering
--------------------------------------- --------------------------------------
Name of Beneficial Owner Number of Shares Percent of Class Number of Shares Percent of Class
- ---------------------------------------- ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Ronald Friedman (2)(5) ................. 1,875,000 75% 1,875,000 50%
Robert Friedman (2)(4) ................. 625,000 25% 625,000 16.67%
Timothy J. Mayette (2) ................. -- -- -- --
Keith S. Haffner (2) ................... -- -- -- --
Joel L. Gold (3)(6) .................... -- -- -- --
Stanley Kreitman (6) ................... -- -- -- --
--------- -- --------- -----
All directors and executive officers as
a group ............................. 2,500,000 100% 2,500,000 66.67%
========= === ========= =====
</TABLE>
- ------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person, (but not those held by
any other person), and that are exercisable within 60 days from the date
of this Prospectus have been exercised. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Address is c/o PMCC Financial Corp., 66 Powerhouse Road, Roslyn Heights,
New York 11577.
(3) Address is c/o Coleman and Company Securities, Inc., 717 Fifth Avenue, New
York, New York 10022.
(4) Includes an aggregate of 40,000 shares owned by Robert Friedman's
daughters, Donna Joyce and Suzanne Gordon, as to which he claims
beneficial ownership; and 287,500 shares held in the name of The Robert
Friedman 1998 Grantor Retained Annuity Trust, of which Robert Freidman is
the Trustee.
(5) Includes 600,000 shares held in the name of The Ronald Freidman 1997
Grantor Retained Annuity Trust, of which Ronald Freidman is the Trustee.
(6) Nominees for Director.
49
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 1,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), none of
which is presently issued and outstanding, and 40,000,000 shares of Common
Stock, par value $.01 per share, of which 2,500,000 shares were issued and
outstanding following the contribution by the Existing Stockholders of their
stock in Premier to the Company pursuant to the Contribution Agreement and are
beneficially owned by Ronald Friedman the Company's President, Chief Executive
Officer and a director of the Board and Robert Friedman, the Company's Chief
Operating Officer, Secretary, Treasurer and Chairman of the Board of Directors.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock are entitled to receive dividends when, as,
and if declared by the Company's Board of Directors out of funds legally
available to the Company. The Company currently intends to retain all future
earnings for the use in the operation of its business and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in the
assets remaining after payment of all liabilities and liquidation of
preferences, if any. Shares of Common Stock are not redeemable and have no
preemptive or similar rights to subscribe for additional shares. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will, upon issuance and payment, be fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), in one or
more series, to designate the number of shares constituting any series, and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, voting rights, rights and terms of redemption, redemption
price or prices and liquidation preferences of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.
The issuance of preferred stock with voting and conversion rights may adversely
effect the voting power of the holders of Common Stock, including the loss of
voting control. The Company has no present plans to issue any shares of
preferred stock. See "Risk Factors -- Effects of Preferred Stock."
Anti-Takeover Provisions; Section 203 of the Delaware General Corporation Law
The Company is subject to Section 203 of the Delaware General Corporation
Law. In general, this statute restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates for a period of three years after
the date of the transaction in which the person became an interested
stockholder unless (i) the transaction is approved by the Board of Directors of
the corporation prior to such business combination; (ii) the interested
stockholder acquires 85% of the corporation's voting stock in the same
transaction in which it exceeds 15%; or (iii) the business combination is
approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. The Company's Certificate of
Incorporation excludes Ronald Friedman the Company's President, Chief Executive
Officer and a director of the Board and Robert Friedman, the Company's Chief
Operating Officer, Secretary, Treasurer and Chairman of the Board of Directors
from the definition of "interested stockholder."
The Company's Certificate of Incorporation and By-Laws include certain
provisions which may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interests, including attempts that might result in a premium over the
market for the shares held by the stockholders and could make it more difficult
to remove incumbent management. The Company's Certificate of Incorporation or
By-Laws provide (i) that the Board of Directors will be divided into three
classes
50
<PAGE>
of directors serving staggered three year terms resulting in approximately
one-third of the Company's Board of Directors being elected each year; (ii)
that directors may be removed from office only for cause and only by the
affirmative vote of the holders of 66 2/3% of the then outstanding shares of
capital stock entitled to vote generally in an election of directors; (iii)
that, except as otherwise required by law, vacancies in the Board of Directors
may be filled only by the remaining directors; (iv) that commencing with the
consummation of the Offering, any action required or permitted to be taken by
the stockholders of the Company may be effected only at an annual or special
meeting of stockholders and not by written consent of the stockholders; (v)
that any meeting of stockholders may be called only upon the affirmative vote
of at least a majority of the members of the Board of Directors; and (vi) for
an advance notice procedure for the nomination other than by or at the
discretion of the Board of Directors or a committee of the Board of Directors
the candidates for election as directors as well as for other stockholder
proposals to be considered at annual meetings of the stockholders. In general,
notice of an intent to nominate a director or raise business at such meetings
must be received by the Company not less than 60 nor more than 90 days before
the meeting and must contain certain information concerning the person to be
nominated or the matters to be brought before the meeting and concerning
stockholders submitting the proposal. The affirmative vote of at least a
majority of the directors or the holders of at least 66 2/3% of the voting
power of the Company's stock is required to alter, amend, repeal or adopt any
provision inconsistent with the provisions described in this paragraph.
The Delaware statute, the Certificate of Incorporation and the By-Laws may
discourage certain types of transactions involving an actual or potential
change in control of the Company.
Transfer Agent
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,250,000 shares of Common Stock sold in this Offering will be freely
transferable without restriction or further registration under the Securities
Act unless acquired by an "affiliate" of the Company within the meaning of the
Securities Act. Upon completion of this Offering, the Existing Stockholders of
the Company will own 2,500,000 shares of Common Stock. All of these shares are
deemed "restricted securities" as defined by Rule 144 under the Securities
("Rule 144"). Upon expiration of the contractual restrictions between the
Company, its officers and directors and the Underwriter, beginning 15 months
after the date of this Prospectus, these shares will be available for sale in
the public market, subject to compliance with Rule 144 or may be sold at any
time through an effective registration statement registering these shares.
Rule 144, as currently in effect, provides that a person (or persons whose
sales are aggregated) who is an affiliate of the Company, or who has
beneficially owned shares for at least one year which were issued and sold in
reliance upon certain exemptions from registration under the Act ("Restricted
Shares"), is entitled to sell within any three month period a number of shares
that does not exceed the greater of one percent of the then outstanding shares
of Common Stock or the average weekly trading volume in the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about the Company. However, a person
who has beneficially owned Restricted Shares for at least two years and who is
not an affiliate of the Company may sell such shares under Rule 144 without
regard to volume limitations, manner-of-sale provisions, notice requirements or
the availability of current public information about the Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act ("Rule
701") may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such options (including
exercises after the date of this Prospectus). Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning one year after the date of this Prospectus, may be
sold by persons other than Affiliates subject only to the manner of sale
provisions of Rule 144 and by Affiliates under Rule 144 without compliance with
its one-year minimum holding period requirements.
Prior to the Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of Restricted Shares or the availability of Restricted Shares for sale
will have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of Restricted Shares in the public market could
adversely affect prevailing market prices.
52
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Coleman and Company Securities,
Inc. ("Coleman") and ISG Capital Markets, LLC ("ISG") are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, between the Company and the
Representatives (the "Underwriting Agreement"), to purchase from the Company,
and the Company has agreed to sell to the Underwriters on a firm commitment
basis, the respective number of shares of Common Stock set forth opposite their
name below:
Number of
Underwriter Shares
----------- ------------
Coleman and Company Securities, Inc. ......... 565,000
ISG Capital Markets, LLC ..................... 565,000
Brean Murray & Co., Inc. ..................... 20,000
First Southwest Company ...................... 20,000
Genesis Merchant Group Securities ............ 20,000
The Seidler Companies Incorporated ........... 20,000
J.W. Charles Securities, Inc. ................ 10,000
Trautman, Kramer & Company, Inc. ............. 10,000
W.J. Nolan & Company, Inc. ................... 10,000
Waldron & Co., Inc. .......................... 10,000
-------
Total .................................... 1,250,000
=========
The Underwriters are committed to purchase all of the Shares offered
hereby, if any of the Shares are purchased. The Underwriting Agreement provides
that the obligations of the several Underwriters are subject to conditions
precedent specified therein.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Shares to the public at the public offering
price set forth on the cover page hereof and to certain dealers (who may be
Underwriters) at a price that represents a concession not in excess of $0.40
per share. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $0.10 per share to other Underwriters or to certain
other dealers. After the initial public offering, the public offering price and
such concessions may be changed by the Underwriters. The Underwriters have
informed the Company that they do not intend to confirm sales to accounts over
which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make. The Company has
agreed to pay the Representatives a non-accountable expense allowance of 3% of
the gross proceeds from the sale of the Shares offered hereby, of which $50,000
has been paid as of the date of this Prospectus.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 45 days from the date of this Prospectus, to purchase up to
187,500 additional shares of Common Stock, at the initial public offering price
set forth on the cover page hereof, less underwriting discounts and
commissions. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of shares of Common Stock as the percentage it was obligated to
purchase pursuant to the Underwriting Agreement. Such option may be exercised
only for the purpose of covering over-allotments, if any, incurred in the same
of the Common Stock offered hereby. The Underwriters may exercise such option
to purchase additional shares solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares
offered hereby.
Upon consummation of this Offering, the Company has agreed to sell to the
Representatives and its designees, for nominal consideration, warrants to
purchase from the Company up to an aggregate of 125,000 shares of Common Stock
(the "Representatives' Warrants"). The Representatives' Warrants are
exercisable at a price of $12.60 per share (140% of the assumed initial public
offering price per share) for a period of four years commencing at the
beginning of the second year after their issuance and sale. Subject to the
Rules of the National Association of Securities Dealers, Inc., the
Representatives' Warrants contain anti-dilution provisions providing
53
<PAGE>
for adjustment of the exercise price and the number of shares of Common Stock
issuable upon the exercise thereof in certain events, including stock
dividends, stock splits, recapitalizations, and sales of shares of Common Stock
below current market price (as defined). The Representatives' Warrants may not
be sold, transferred, assigned, or hypothecated until one year after the date
of this Prospectus, except that they may be transferred, in whole or in part,
to (i) one or more officers or partners of the Representatives' (or the
officers or partners of any such partner); (ii) any other underwriting firm or
member of the selling group which participated in this Offering (or the
officers or partners of any such firm); (iii) a successor to any
Representative, or the officers or partners of such successor, (iv) a purchaser
of substantially all of the assets of a Representative, or (v) by operation of
law. The Representatives' Warrants provide for adjustments in the number of
shares of Common Stock issuable upon the exercise thereof and in the exercise
price of the Representatives' Warrants as a result of certain events, including
subdivisions and combinations of the shares of Common Stock. The
Representatives' Warrants grant the holders thereof certain rights of
registration for the Common Stock issuable upon exercise of the
Representatives' Warrants. The shares underlying the Representatives' Warrant
issued in connection with this Offering are included in the aggregate number of
shares covered by this Registration Statement.
The Company shall bear all fees and expenses incurred by the Company in
connection with the preparation and filing of Post-Effective Amendments to the
Registration Statement of which this Prospectus forms a part or new
Registration Statements with respect to such rights of registration, except
that the holders of the Representatives' Warrants shall pay any underwriting
discounts or commission and expenses of their own legal counsel.
In connection with this Offering, the Company has agreed to appoint a
designee of Coleman as a director for a period of three years. Coleman's
initial designee is Joel L. Gold. Additionally, Coleman and ISG have been named
as investment banking advisers for a 24 month period effective upon the
consummation of this Offering. For such services, the Company has agreed to pay
Coleman and ISG an aggregate monthly fee in the aggregate amount of $3,000,
payable in advance at the closing of this Offering.
All of the officers, directors and security holders of the Company as of
the date of this Prospectus have agreed not to, directly or indirectly, offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any equity securities of the Company for a period of 15 months
following the effective date of the Registration Statement without the prior
written consent of the Representatives. An appropriate legend shall be marked
on the reverse of the certificate representing all such securities. The Company
has agreed not to, without the prior written consent of the Representatives,
offer, issue, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any equity securities for a period of 15 months following
the effective date of the Registration Statement, except for options under the
Option Plan which have an exercise price no less than the market price of the
Common Stock on the date of grant.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Company's
Common Stock. Such transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position of the account of the
Underwriters by selling more of the Common Stock in connection with the
Offering then they are committed to purchase from the Company, and in such case
may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position by exercising the
Over-Allotment Option. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to the shares of Common Stock that are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may stabilize or maintain the price of the Common Stock at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Representatives. Among
the factors considered in determining the initial public offering price are the
history of, and the
54
<PAGE>
prospects for, the Company's business and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
prospects for earnings of the Company, the present state of the Company's
development, the general condition of the securities market at the time of the
offering and the market prices and earnings of similar securities of comparable
companies at the time of the offering and prevailing market and economic
conditions.
The foregoing is a summary of the agreements described above and does not
purport to be complete. Reference is made to copies of each such agreement
which are filed as exhibits to the Registration Statement. See "Available
Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York. Brock Fensterstock Silverstein & McAuliffe LLC, New York, New York, has
acted as legal counsel to the Underwriters in connection with this Offering.
EXPERTS
The Consolidated Financial Statements of Premier Mortgage Corp. and its
subsidiaries as of December 31, 1996, and for the year then ended, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The Financial Statements of Premier Mortgage Corp. as of December 31,
1995, and for the years ended December 31, 1995 and 1994, have been included
herein and in the Registration Statement in reliance upon the report of
Freeberg & Freeberg, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The financial statements audited by Freeberg & Freeberg contain
no adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. In 1996, the Company
determined to change auditors to KPMG Peat Marwick LLP. The Company's Board of
Directors approved this change in auditors. There were no disagreements at any
time between the Company and Freeberg & Freeberg pertaining to any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures.
AVAILABLE INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov.
55
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page. No.
----------
<S> <C>
Reports of Independent Auditors .......................................................... F-2
Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and 1995 and at September 30, 1997 (unaudited) ...... F-4
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 and for the
Nine Months Ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited).... F-5
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1995
and 1994 and for the Nine Months Ended September 30, 1997 (unaudited) ................. F-6
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and for the
Nine Months Ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited).... F-7
Notes to Consolidated Financial Statements ............................................... F-8
</TABLE>
The financial statements of PMCC Financial Corp., the Registrant, have
been omitted because PMCC Financial Corp. has not yet issued any stock, has no
assets or liabilities and has not yet conducted any business other than of an
organizational nature.
F-1
<PAGE>
Independent Auditors' Report
The Shareholders
Premier Mortgage Corp.:
We have audited the accompanying consolidated balance sheet of Premier
Mortgage Corp. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Premier
Mortgage Corp. and subsidiary as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Jericho, New York
March 31, 1997
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors
Premier Mortgage Corp.
Roslyn Heights, New York 11577
Gentlemen:
We have audited the accompanying balance sheet of Premier Mortgage Corp.
as of December 31, 1995 and the related statements of operations and changes in
shareholders' equity, and cash flows for the years ended December 31, 1995 and
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Premier Mortgage Corp. as
of December 31, 1995 and the results of its operations and its cash flows for
the years ended December 31, 1995 and December 31, 1994, in conformity with
generally accepted accounting principles.
Freeberg & Freeberg
Certified Public Accountants
Westbury, New York
April 2, 1996
F-3
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
----------------------------- ---------------------------
Pro forma
1997 1997 1996 1995
------------- ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents .................. $ 366,807 366,807 409,788 399,957
Debt and equity securities available-for-
sale ...................................... 131,000 131,000 75,000 354,495
Receivable from sales of loans ............. 31,103,732 31,103,732 9,837,837 1,356,802
Mortgage loans held for sale, net .......... 19,809,113 19,809,113 2,874,900 5,537,000
Mortgage loans held for investment ......... -- -- 138,052 140,292
Accrued interest receivable ................ 170,158 170,158 53,161 10,114
Other receivables, net of allowance for
indemnity losses of $70,470, $70,470,
$28,500 and $0, respectively............... 471,299 471,299 208,769 132,624
Residential rehabilitation properties ...... 12,408,107 12,408,107 3,246,361 --
Furniture, fixtures and equipment, net ..... 251,510 251,510 209,937 206,891
Prepaid expenses and other assets .......... 107,654 107,654 99,421 93,416
----------- ---------- --------- ---------
Total assets ............................ $64,819,380 64,819,380 17,153,226 8,231,591
=========== ========== ========== =========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable -- principally
warehouse lines of credit ............... 56,644,112 56,644,112 13,923,063 6,476,359
Notes payable -- shareholder .............. 293,163 293,163 275,000 --
Due to affiliates ......................... 3,035,325 3,035,325 761,661 465,358
Accrued expenses and other liabilities .... 770,225 770,225 285,785 175,516
Federal and state income tax payable ...... 18,437 18,437 12,000 --
Deferred tax liability .................... 965,000 -- -- --
S corporation distribution payable ........ 1,393,118 -- -- --
----------- ---------- ---------- ---------
Total liabilities ...................... 63,119,380 60,761,262 15,257,509 7,117,233
----------- ---------- ---------- ---------
Minority interest in net assets of
subsidiary ................................ -- -- 18,163 --
----------- ---------- ---------- ---------
Shareholders' equity:
Common stock, Class A, no par value;
2,500 shares authorized; 100 shares
issued and outstanding .................. 5,000 5,000 5,000 5,000
Common stock, Class B, no par value;
1,000 shares authorized; 25 shares
issued and outstanding .................. 1,250 1,250 1,250 1,250
Additional paid-in capital ................ 711,775 711,775 711,775 711,775
Retained earnings ......................... 925,975 3,284,093 1,159,529 392,758
Unrealized gain on securities
available-for-sale, net ................. 56,000 56,000 -- 3,575
----------- ---------- ---------- ---------
Total shareholders' equity .............. 1,700,000 4,058,118 1,877,554 1,114,358
----------- ---------- ---------- ---------
Total liabilities and
shareholders' equity ................ $64,819,380 64,819,380 17,153,226 8,231,591
=========== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the nine months
ended September 30, For the years ended December 31,
--------------------------- ------------------------------------------
1997 1996 1996 1995 1994
-------------- ----------- -------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of residential rehabilitation properties..... $ 17,519,462 1,016,500 5,073,253 -- --
Gains on sales of mortgage loans, net ............. 8,641,550 4,254,846 6,104,397 3,168,565 1,174,533
Interest earned ................................... 1,412,083 563,261 735,802 231,916 10,424
Gain on sale of securities available-for-sale ..... -- 29,605 29,605 -- 1,562
------------ --------- --------- --------- ---------
27,573,095 5,864,212 11,943,057 3,400,481 1,186,519
------------ --------- ---------- --------- ---------
Expenses:
Cost of sales, residential rehabilitation
properties ...................................... 16,522,515 951,744 4,788,944 -- --
Compensation and benefits ......................... 4,790,405 2,617,789 3,674,490 2,069,443 709,071
Advertising and promotion ......................... 132,460 114,359 207,381 71,879 55,798
Brokers fees paid and other loan costs ............ 669,232 124,368 237,147 85,555 --
Occupancy and equipment ........................... 243,003 161,392 208,929 157,734 84,588
Messenger service ................................. 79,220 56,929 81,400 50,533 21,030
Office supplies and expense ....................... 126,077 117,623 155,868 83,087 34,316
Telephone ......................................... 138,296 87,318 120,239 106,547 61,328
Interest expense .................................. 1,573,591 534,175 839,284 245,281 20,132
Other operating expenses .......................... 784,032 308,299 564,190 327,262 138,244
------------ --------- ---------- --------- ---------
25,058,831 5,073,996 10,877,872 3,197,321 1,124,507
------------ --------- ---------- --------- ---------
Income before income tax expense and
minority interest ................................. 2,514,264 790,216 1,065,185 203,160 62,012
Income tax expense ................................. 25,198 14,290 13,790 7,631 --
------------ --------- ---------- --------- ---------
Income before minority interest ................. 2,489,066 775,926 1,051,395 195,529 62,012
Minority interest in net income of
subsidiary ........................................ -- 5,680 17,863 -- --
------------ --------- ---------- --------- ---------
Net income ...................................... $ 2,489,066 770,246 1,033,532 195,529 62,012
============ ========= ========== ========= =========
Unaudited pro forma information:
Historical income before income tax expense
and minority interest ........................... 2,514,264 1,065,185
Adjustment to compensation expense for
contractual increase in officers' salary ........ (91,000) (139,000)
------------ ----------
Pro forma net income before income tax
expense and minority interest ................... 2,423,264 926,185
Provision for pro forma income taxes .............. (1,000,000) (391,000)
------------ ----------
Pro forma income before minority interest ......... 1,423,264 535,185
Minority interest in net income of subsidiary (17,863)
------------ ----------
Pro forma net income .............................. $ 1,423,264 517,322
============ ==========
Pro forma net income per share of common
stock ........................................... $ 0.53 0.20
============ ===========
Pro forma weighted average number of
shares and share equivalents outstanding......... 2,694,751 2,611,111
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
gain on
Additional securities
Capital paid-in Retained available-
stock capital earnings for-sale, net Total
--------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ............ $ 5,000 113,025 387,014 -- 505,039
Net income .............................. -- -- 62,012 -- 62,012
Distributions ........................... -- -- (102,020) -- (102,020)
------- ------- -------- ----- --------
Balance at December 31, 1994 ............ 5,000 113,025 347,006 -- 465,031
Issuance of capital stock ............... 1,250 -- -- -- 1,250
Net income .............................. -- -- 195,529 -- 195,529
Capital contribution .................... -- 598,750 -- -- 598,750
Distributions ........................... -- -- (149,777) -- (149,777)
Unrealized gain on securities
available-for-sale, net ................ -- -- -- 3,575 3,575
------- ------- -------- ----- --------
Balance at December 31, 1995 ............ 6,250 711,775 392,758 3,575 1,114,358
Net income .............................. -- -- 1,033,532 -- 1,033,532
Decrease in unrealized gain on securities
available-for-sale, net ................ -- -- -- (3,575) (3,575)
Distributions ........................... -- -- (266,761) -- (266,761)
------- ------- --------- ------ ---------
Balance at December 31, 1996 ............ 6,250 711,775 1,159,529 -- 1,877,554
Net income .............................. -- -- 2,489,066 -- 2,489,066
Distributions ........................... -- -- (364,502) -- (364,502)
Unrealized gain on securities
available-for-sale, net ................ -- -- -- 56,000 56,000
------- ------- --------- ------ ---------
Balance at September 30, 1997
(unaudited) ............................ $ 6,250 711,775 3,284,093 56,000 4,058,118
======= ======= ========= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the nine months
ended September 30,
---------------------------------
1997 1996
---------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 2,489,066 770,246
Adjustments to reconcile net income to net cash used in
operating activities:
Residential Rehabilitation Activities:
Proceeds from sales .............................................. (17,519,462) (1,016,500)
Cost of sales .................................................... 16,522,515 951,744
Contractual fee earned ........................................... 996,947 64,756
Depreciation and amortization .................................... 44,183 30,000
(Increase) decrease in accrued interest receivable ............... (116,997) (54,886)
(Decrease) increase in minority interest in net income of
subsidiary ...................................................... (18,163) 5,680
Net increase in receivable from sales of loans ................... (21,265,895) (2,598,359)
Net (increase) decrease in mortgage loans held for sale .......... (16,246,213) 940,330
Net increase in residential rehabilitation properties ............ (9,161,746) (3,220,519)
Provision for indemnity losses ................................... 41,970 9,431
Net (increase) decrease in deferred loan costs ................... (688,000) (132,000)
Gains on sale of securities available-for-sale ................... -- (29,605)
(Increase) decrease in other receivables ......................... (304,500) (164,999)
(Increase) decrease in prepaid expenses and other assets ......... (8,233) 62,988
Increase (decrease) in due to affiliates ......................... 2,273,664 1,261,847
Increase in accrued expenses, tax payable and other
liabilities ..................................................... 490,877 64,104
-------------- ----------
Net cash used in operating activities ......................... (42,469,987) (3,055,742)
-------------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment, net of
dispositions ..................................................... (85,756) (9,447)
Purchases of securities available-for-sale ........................ -- --
Proceeds from sales of securities available-for-sale .............. -- 380,525
Principal repayments on mortgage loans held for investment ........ 138,052 884
Purchase of mortgage loan held for investment ..................... -- --
Sale of mortgage loan held for investment, net .................... -- --
-------------- ----------
Net cash provided by (used in) investing activities ........... 52,296 371,962
-------------- ----------
Cash flows from financing activities:
Distributions to shareholders ..................................... (364,502) (137,740)
Net increase in notes payable-shareholder ......................... 18,163 --
Net increase in notes payable-principally warehouse lines of
credit ........................................................... 42,721,049 3,922,943
Proceeds from issuance of common stock and capital
contribution ..................................................... -- --
-------------- ----------
Net cash provided by financing activities ..................... 42,374,710 3,785,203
-------------- ----------
Net (decrease) increase in cash and cash equivalents ............... (42,981) 1,101,423
Cash and cash equivalents at beginning of period ................... 409,788 399,957
-------------- ----------
Cash and cash equivalents at end of period ......................... $ 366,807 1,501,380
============== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................................... $ 1,604,930 531,060
============== ==========
Income taxes ..................................................... $ 18,761 26,057
============== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------
1996 1995 1994
--------------- --------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................ 1,033,532 195,529 62,012
Adjustments to reconcile net income to net cash used in
operating activities:
Residential Rehabilitation Activities:
Proceeds from sales .............................................. (5,073,253) -- --
Cost of sales .................................................... 4,788,944 -- --
Contractual fee earned ........................................... 284,309 -- --
Depreciation and amortization .................................... 47,431 35,875 20,601
(Increase) decrease in accrued interest receivable ............... (43,047) (10,114) 670
(Decrease) increase in minority interest in net income of
subsidiary ...................................................... 17,863 -- --
Net increase in receivable from sales of loans ................... (8,481,035) (1,356,802)
Net (increase) decrease in mortgage loans held for sale .......... 2,750,100 (4,758,473) (556,527)
Net increase in residential rehabilitation properties ............ (3,246,361) -- --
Provision for indemnity losses ................................... 28,500 -- --
Net (increase) decrease in deferred loan costs ................... (87,700) (197,000) 7,000
Gains on sale of securities available-for-sale ................... (29,605) -- (1,562)
(Increase) decrease in other receivables ......................... (104,645) (143,414) 12,633
(Increase) decrease in prepaid expenses and other assets ......... (6,005) 1,458 (26,679)
Increase (decrease) in due to affiliates ......................... 296,303 457,535 (900)
Increase in accrued expenses, tax payable and other
liabilities ..................................................... 122,269 106,462 8,530
---------- ---------- --------
Net cash used in operating activities ......................... (7,702,400) (5,668,944) (474,222)
---------- ---------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment, net of
dispositions ..................................................... (50,477) (121,397) (48,686)
Purchases of securities available-for-sale ........................ (75,000) (350,920) (10,000)
Proceeds from sales of securities available-for-sale .............. 380,525 -- 11,562
Principal repayments on mortgage loans held for investment ........ 2,240 1,961 1,239
Purchase of mortgage loan held for investment ..................... -- -- (80,000)
Sale of mortgage loan held for investment, net .................... -- -- 95,000
---------- ---------- --------
Net cash provided by (used in) investing activities ........... 257,288 (470,356) (30,885)
---------- ---------- --------
Cash flows from financing activities:
Distributions to shareholders ..................................... (266,761) (149,777) (102,020)
Net increase in notes payable-shareholder ......................... 275,000 -- --
Net increase in notes payable-principally warehouse lines of
credit ........................................................... 7,446,704 5,919,832 556,527
Proceeds from issuance of common stock and capital
contribution ..................................................... -- 600,000 --
---------- ---------- --------
Net cash provided by financing activities ..................... 7,454,943 6,370,055 454,507
---------- ---------- --------
Net (decrease) increase in cash and cash equivalents ............... 9,831 230,755 (50,600)
Cash and cash equivalents at beginning of period ................... 399,957 169,202 219,802
---------- ---------- --------
Cash and cash equivalents at end of period ......................... 409,788 399,957 169,202
========== ========== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................................... 754,284 188,616 20,132
========== ========== ========
Income taxes ..................................................... 8,222 2,357 16,176
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
Premier Mortgage Corporation (the Company) was incorporated on December
20, 1989, under the laws of the State of New Jersey and was licensed as a
mortgage banker in New Jersey in January 1991. Its principal business activity
is the origination of mortgage loans and the immediate sale of such loans in
the secondary market. Currently all loans are sold servicing released.
The Company also performs business in the State of New York as PMC
Mortgage Co. Operations began as a mortgage broker in March 1992, and as a
licensed mortgage banker in September 1994.
The Company is also licensed as a mortgage banker in the states of
Connecticut and Florida.
At September 30, 1997, the Company had four wholly-owned subsidiaries: RF
Properties Corp., which was incorporated on August 1, 1996 and, through
December 31, 1996 was 77% owned by the Company (on January 1, 1997, the Company
purchased the remaining interest from the sole minority shareholder); and
Jericho Properties Corp., 66 Properties Corp. and JSF Properties Corp., which
began business during the first half of 1997 and are all wholly-owned by the
Company. The principal business activities of the subsidiaries are to provide
short-term funding for the purchase, rehabilitation and resale of vacant
one-to-four family residences.
In April 1997, the Company opened its BCD division which closes and pools
BCD (subprime) type loans. The pools are put out to bid based upon a weighted
average coupon price.
All of the shares of the Company are beneficially owned by two
individuals, one of which also owned the minority interest in RF Properties
Corp.
(a) Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP).
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and results of
operations for the periods then ended. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(b) Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For the purposes of reporting cash flows, cash includes cash on hand and
money market accounts with a maturity of three months or less.
(d) Securities
At September 30, 1997 and December 31, 1996 and 1995, the Company
classified its holdings of debt securities and readily marketable equity
securities as "available for sale", which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. At the time of new securities purchases, a
determination will be made as to the appropriate classification pursuant to
Statement of Financial Accounting Standards (SFAS) No.115, "Accounting for
Certain Investments in Debt and Equity Securities".
F-8
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(1) Summary of Significant Accounting Policies -- (Continued)
Premiums and discounts on debt securities, if any, are amortized to
expense and accreted to income over the estimated life of the respective
security using the interest method. Gains and losses on the sales of securities
are recognized on realization, using the specific identification method, and
shown separately in the consolidated statements of operations.
(e) Receivables from Sales of Loans
Receivables from the sales of loans represents proceeds due from investors
for loan sales transactions which closed prior to the balance sheet date. All
amounts due to the Company were collected subsequent to the balance sheet date.
(f) Mortgage Loans Held for Sale
Mortgage loans held for sale, net of any deferred loan origination fees or
costs, are carried at the lower of cost or market value as determined by
outstanding commitments from investors. Gains resulting from sales of mortgage
loans are recognized as of the date the loans are shipped to permanent
investors. Losses are recognized in the period when market value is less than
cost. Net deferred origination costs were $131,000, $190,000 and $40,000 at
September 30, 1997, December 31, 1996 and 1995,respectively.
(g) Mortgage Loans Held for Investment
Mortgage loans held for investment at December 31, 1996 and 1995 is
comprised of one loan which was originated and two loans which were purchased
by the Company in prior years for the purpose of holding for investment. There
were no mortgage loans held for investment at September 30, 1997.
Mortgage loans held for investment were carried at cost and consisted of
mortgages on residential real estate. Contractual maturities were after ten
years. During 1997, the mortgage loans held for investment were repaid by the
mortgagees. There were no gains or losses recorded on this repayment.
(h) Residential Rehabilitation Properties
Each of the Company's subsidiaries serves as a conduit for funding the
acquisition of residential rehabilitation properties. The properties are
acquired and marketed by various independent contractors, but funded by, and
titled in the name of, one of the subsidiaries. Upon sale, the subsidiaries
receive an agreed upon fee plus reimbursement for any acquisition and
renovation costs advanced. In the event the properties are not sold within an
agreed-upon time period, generally within three to five months of acquisition,
the subsidiaries are also entitled to receive an additional interest
cost-to-carry. The Company records as revenue the gross sales price of these
properties at such time the properties are sold to the ultimate purchasers and
it records cost of sales equal to the difference between such gross sales price
and the amount of its contracted income pursuant to its agreements with
independent contractors. The residential rehabilitation properties are carried
at the lower of cost (generally at up to 70% of the property's appraised value)
or fair value less cost to sell (as determined by independent appraisals of the
properties). The agreements with the independent contractors contain
cross-collateralization provisions and personal guarantees that minimize the
risks associated with changes in economic conditions and failure of the
contractors to perform.
(i) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. The Company provides for depreciation utilizing the straight-line
method over the estimated useful lives of the assets.
(j) Commitment Fees
Commitment fees received, which arise from agreements with borrowers that
obligate the Company to make a loan or to satisfy an obligation under a
specified condition, are initially deferred and recognized as income as loans
are delivered to investors, or when it is evident that the commitment will not
be utilized.
F-9
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(1) Summary of Significant Accounting Policies -- (Continued)
(k) Loan Origination Fees
Loan origination fees received and direct costs of originating loans are
deferred and recognized as income when the loans are sold to investors.
(l) Income Taxes
The Company, 66 Properties Corp. and JSF Properties Corp. have elected to
be treated as S corporations for both Federal and New York and New Jersey state
income tax purposes as of and for the nine months ended September 30, 1997 and
1996, and as of and for the years ended December 31, 1996, 1995 and 1994. As a
result, the income of the Company and the aforementioned subsidiaries is taxed
directly to the individual shareholders.
RF Properties Corp. was taxed as a regular C corporation for both Federal
and state income tax purposes for the period from August 5, 1996 (commencement
of operations) to December 31, 1996, as well as, together with Jericho
Properties Corp., for the month ended January 31, 1997; thereafter, these
subsidiaries also elected to be treated as an S corporations for both Federal
and state income tax purposes.
(m) Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No.125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for
as a secured borrowing with pledge of collateral. The Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and was adopted by the Company
effective January 1, 1997.
(2) Interim Period Information
The unaudited financial statements and related notes as of September 30,
1997 and for the nine-month periods ended September 30, 1996 and 1997 reflect,
in the opinion of management, all adjustments (which are of a normal and
recurring nature) necessary to fairly present the statements of operations,
cash flows and balance sheets as of and for the periods presented.
F-10
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(3) Debt and Equity Securities Available-for-Sale
The amortized cost and estimated fair values of securities are summarized
as follows:
<TABLE>
<CAPTION>
September 30, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity security:
Common stock .. ....... $ 75,000 56,000 -- 131,000
======== ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Debt security:
12% convertible note ......... $ 75,000 -- -- 75,000
======== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities:
Money market mutual fund ......... $ 350,920 6,294 2,719 354,495
========= ===== ===== =======
</TABLE>
<PAGE>
In 1996, the Company purchased a 12% convertible note from an investment
company. The convertible note matures the earlier of December 31, 1999, or the
initial public offering of the investment company. The investment company
became a public company in March 1997, upon which the note was converted to
shares of common stock. Because the common stock is restricted and cannot
currently be sold in the open market, the Company estimated fair value at a
significant discount from the common stock's quoted price.
The Company realized a gross gain of approximately $30,000 and $2,000 for
the years ended December 31, 1996 and 1994, respectively, on the sale of its
equity securities available-for-sale. Gross proceeds from the sale of
securities available for sale were $380,525, $380,525, and $11,562 for the nine
months ended September 30, 1996 and for the years ended December 31, 1996 and
1994, respectively.
(4) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment at September 30, 1997 and December 31,
1996 and 1995 and their related useful lives are summarized as follows:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------
1997 1996 1995 Life in years
--------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Furniture and fixtures ............................ $ 260,398 220,543 210,356 7
Office equipment .................................. 167,021 121,120 80,830 5
---------- ------- -------
427,419 341,663 291,186
Accumulated depreciation and amortization ......... (175,909) (131,726) (84,295)
---------- -------- -------
Furniture, fixtures and equipment, net ............ $ 251,510 209,937 206,891
========== ======== =======
</TABLE>
F-11
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(4) Furniture, Fixtures and Equipment -- (Continued)
Depreciation and amortization expense, included in occupancy and equipment
in the consolidated statements of operations, amounted to $44,183 and $30,000
for the nine months ended September 30, 1997 and 1996, respectively, and
$47,431, $35,875 and $20,601 for the years ended December 31, 1996, 1995 and
1994, respectively.
(5) Notes Payable
Notes payable consisted of the following at September 30, 1997 and
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------
1997 1996 1995
--------------- ------------ ------------
<S> <C> <C> <C>
Warehouse facility - PNC ............................ $55,880,987 13,923,063 --
Warehouse line of credit - Fleet (formerly NatWest) . -- -- 2,488,447
Warehouse line of credit - China Trust .............. -- -- 3,987,912
Notes payable -- other .............................. 763,125 -- --
Notes payable - shareholder ......................... 293,163 275,000 --
----------- ---------- ---------
$56,937,275 14,198,063 6,476,359
=========== ========== =========
</TABLE>
At September 30, 1997 and December 31, 1996 and 1995, substantially all of
the mortgage loans held for sale and receivable from sales of loans were
pledged to secure notes payable to the various financial institutions under
warehouse lines of credit agreements. The notes are repaid as the related
mortgage loans are sold or collected.
The total lines of credit at September 30, 1997 and December 31, 1996 and
1995, were $50,000,000, $15,000,000 and $10,000,000, respectively. The Company
may borrow up to 98% of the face value of the closed mortgage loans. In 1997
and 1996, a portion of the line of credit was also used to fund purchases of
residential rehabilitation properties. The terms of the current line of credit
call for an interest rate over the one month London Interbank Offered Rate
(LIBOR), of 2% for adjustable rate mortgages and 2.25% for fixed rate
mortgages. At December 31, 1995, the interest rate was .75% over the banks'
prime rate.
At September 30, 1997, the Company had additional financing available
under a mortgage loan purchase agreement with PNC. The agreement provides the
Company up to $20 million of additional funds for loan originations through the
Company's sale to PNC of originated mortgage loans previously funded under the
line of credit and committed to be sold to institutional investors. Under the
agreement, which is being accounted for as a financing, the Company is required
to arrange for the institutional investors to take delivery of the loans,
generally within 20 days of their sale to PNC; otherwise it is required to
repurchase the loans. PNC has discretion as to the amounts of loan purchases it
is willing to make and the agreement is terminable by PNC at any time.
The Company had $35,445,000 outstanding under the $50,000,000 line of
credit and $20,435,000 outstanding under the $20,000,000 mortgage loan purchase
agreement at September 30, 1997.
The note payable - other of $763,125 at September 30, 1997 is secured by
specific residential rehabilitation properties being financed and matures upon
sale of the underlying properties.
The notes payable to shareholder bore interest at an annual rate of 8.00%
and were due in 1998. Such amounts were fully repaid on January 1, 1998.
(6) Noncancelable Operating Leases
The Company is obligated under various operating lease agreements relating
to branch and executive offices. Lease terms expire during the years 1998 to
2002, subject to renewal options. Management expects that in the normal course
of business, leases will be renewed or replaced by other leases.
F-12
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(6) Noncancelable Operating Leases -- (Continued)
The following schedule represents future minimum rental payments required
under noncancelable operating leases for office space and equipment as of
December 31, 1996:
Year ending December 31:
1997 .............................................. $ 188,656
1998 .............................................. 173,924
1999 .............................................. 178,091
2000 .............................................. 85,990
2001 .............................................. 61,763
Thereafter ........................................ 61,763
---------
Total minimum payments required ......... $ 750,187
=========
Total rent expense for the nine months ended September 30, 1997 and 1996
was $155,780 and $78,183, respectively, and for the years ended December 31,
1996, 1995 and 1994 was $108,674, $64,189 and $35,198, respectively.
On September 24, 1997, the Company amended one of its operating leases to
include additional office space. This amendment increases the total future
minimum rental payments required as disclosed above by approximately $229,000.
(7) Employee Benefits
The Company maintains a 401(k) Profit Sharing Plan (the 401(k) Plan) which
was created effective January 1, 1994 for all employees who have completed six
months of continuous service. The Company matches 50% of the first 2.5% of each
employee's contribution. The Company's 401(k) Plan expense was approximately
$42,500 and $12,200 for the nine months ended September 30, 1997 and 1996,
respectively, and $18,600, $12,000 and $7,350, respectively, for the years
ended December 31, 1996, 1995 and 1994.
(8) Related-Party Transactions
In the normal course of business, advances are made by and to the Company
with affiliates. At September 30, 1997 and December 31, 1996 and 1995, the
Company had a net liability of $3,035,325, $761,661 and $465,358, respectively,
due to affiliates. Such transactions are made on substantially the same terms
and conditions, including interest rate and collateral, as those prevailing at
the same time for comparable transactions with unrelated third-parties.
On August 25, 1997, the Company subordinated $1,000,000 of its "due to
affiliates" to its warehouse line of credit.
(9) Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of the Company's business, there are various
financial instruments which are appropriately not recorded in the financial
statements. The Company's risk of accounting loss, due to the credit risks and
market risks associated with these off-balance sheet instruments, varies with
the type of financial instrument and principal amounts, and are not necessarily
indicative of the degree of exposure involved. Credit risk represents the
possibility of a loss occurring from the failure of another party to perform in
accordance with the terms of a contract. Market risk represents the possibility
that future changes in market prices may make a financial instrument less
valuable or more onerous.
F-13
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(9) Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk -- (Continued)
In the ordinary course of business, the Company had issued commitments to
borrowers to fund approximately $28,000,000 and $16,500,000, respectively, of
mortgage loans at September 30, 1997 and December 31, 1996. Of these
commitments to fund, $10,484,000 and $3,748,000, respectively, relate to
commitments to fund at locked-in rates and $17,516,000 and $12,752,000,
respectively, relate to commitments to fund at floating rates at September 30,
1997 and December 31, 1996.
In the normal course of its mortgage banking activities, the Company
enters into optional commitments to sell the mortgage loans that it originates.
The Company commits to sell the loans at specified prices in future periods,
generally ranging from 30 to 120 days from date of commitment directly to
permanent investors. Market risk is associated with these financial instruments
which results from movements in interest rates and is reflected by gains or
losses on the sale of the mortgage loans determined by the difference between
the price of the loans and the price guaranteed in the commitment.
The Company may be exposed to a concentration of credit risk from a
regional economic standpoint as loans were primarily originated in the New York
Metropolitan area.
(10) Disclosures About Fair Value of Financial Instruments
SFAS No.107, "Disclosures About Fair Value of Financial Instruments",
requires the Company to disclose the fair value of its on-and off-balance sheet
financial instruments. A financial instrument is defined in SFAS No.107 as
cash, evidence of an ownership interest in an entity, or a contract that
creates a contractual obligation or right to deliver or receive cash or another
financial instrument from a second entity on potentially favorable or
unfavorable terms. SFAS No.107 defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale.
The following table represents the carrying amounts and fair values of the
Company's financial instruments as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 December 31, 1995
--------------------------- -------------------------- -------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
amount fair value amount fair value amount fair value
------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ............ $ 366,807 366,807 409,788 409,788 399,957 399,957
Securities available-for-sale ........ 131,000 131,000 75,000 75,000 354,495 354,495
Receivable from sales of loans ....... 31,103,732 31,103,732 9,837,837 9,837,837 1,356,802 1,356,802
Mortgage loans held for sale, net 19,809,113 19,809,113 2,874,900 2,874,900 5,537,000 5,537,000
Mortgage loans held for
investment ......................... -- -- 138,052 138,052 140,292 140,292
Accrued interest receivable .......... 170,158 170,158 53,161 53,161 10,114 10,114
Financial liabilities:
Notes payable-warehouse .............. 56,644,112 56,644,112 13,923,063 13,923,063 6,476,359 6,476,359
Notes payable-shareholder ............ 293,163 293,163 275,000 275,000 -- --
Due to affiliates .................... 3,035,325 3,035,325 761,661 761,661 465,358 465,358
</TABLE>
The carrying amounts in the table are included in the consolidated balance
sheets under the indicated captions.
The following summarizes the major methods and assumptions used in
estimating the fair values of the financial instruments:
Financial Assets
Cash and cash equivalents -- The carrying amounts for cash and cash
equivalents approximate fair value as they mature in 90 days or less and do not
present unanticipated credit concerns.
F-14
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(10) Disclosures About Fair Value of Financial Instruments -- (Continued)
Securities available-for-sale -- Fair value is estimated based on current
market prices, if available, and on estimates made by management.
Receivable for sales of loans and Mortgage loans held for sale, net --
Fair value is estimated based on current prices established in the secondary
market or, for those loans committed to be sold, based upon the price
established in the commitment.
Mortgage loans held for investment -- Fair value is based on management's
analysis of estimated cash flows discounted at rates commensurate with the
credit risk involved.
Accrued Interest Receivable -- The fair value of the accrued interest
receivable balance is estimated to be the carrying value.
Financial Liabilities
Notes payable-principally warehouse -- The fair value of the notes payable
is based on discounting the anticipated cash flows using rates which
approximate the rates offered for borrowings with similar terms.
Notes payable-shareholder -- The fair value of the notes
payable-shareholder is estimated by management to be the carrying value.
Due to affiliates -- The fair value of the due to affiliates balance is
estimated to be the carrying value.
Limitations -- SFAS No.107 requires disclosures of the estimated fair
value of financial instruments. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument nor the resultant tax ramifications or
transaction costs. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(11) Contingencies
Employment Agreements
The Company entered into employment agreements during 1996 and 1997 with
four employees which provided for additional compensation to be earned over a
one or two year term. The additional compensation must be repaid by the
employee in the event that the employee is terminated prior to the one or two
year term.
Litigation
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the Company will not be affected materially by the outcome of such
proceedings.
(12) Supplemental Information
The Company's operations consist of two principal activities (a) mortgage
banking and (b) the funding of the purchase, rehabilitation and resale of
residential real estate. The following table sets forth certain information
concerning these activities (in thousands):
F-15
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(12) Supplemental Information -- (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Residential rehabilitation properties ..................................... $ 5,073 $ -- $ --
Mortgage banking .......................................................... 6,840 3,400 1,185
Other ..................................................................... 30 -- 2
------- ------ ------
$11,943 $3,400 $1,187
======= ====== ======
Less(1):
Expenses allocable to residential rehabilitation properties (cost of sales,
interest expense and compensation and benefits) ......................... $ 4,896 $ -- $ --
Expenses allocable to mortgage banking (all other expenses) ............... 5,982 3,197 1,125
------- ------ ------
$10,878 $3,197 $1,125
======= ====== ======
Operating Profit:
Residential rehabilitation properties ...................................... $ 177 $ -- $ --
Mortgage banking .......................................................... 858 203 60
Other ..................................................................... 30 -- 2
------- ------ ------
$ 1,065 $ 203 $ 62
======= ====== ======
Identifiable Assets:
Residential rehabilitation properties ..................................... $ 3,246 $ --
Mortgage banking .......................................................... 13,907 8,232
------- ------
$17,153 $8,232
======= ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Revenues:
Residential rehabilitation properties .............................................. $17,519 $1,016
Mortgage banking ................................................................... 10,054 4,818
Other .............................................................................. -- 30
------- ------
$27,573 $5,864
======= ======
Less(1):
Expenses allocable to residential rehabilitation properties (cost of sales, interest
expense and compensation and benefits) ........................................... $16,930 $ 965
Expenses allocable to mortgage banking (all other expenses) ........................ 8,129 4,109
------- ------
$25,059 $5,074
======= ======
Operating Profit:
Residential rehabilitation properties .............................................. $ 589 $ 51
Mortgage banking ................................................................... 1,925 709
Other .............................................................................. -- 30
------- ------
$ 2,514 $ 790
======= ======
Identifiable Assets:
Residential rehabilitation properties .............................................. $12,408
Mortgage banking ................................................................... 52,411
-------
$64,819
=======
</TABLE>
- ------------
(1) In managing its business, the Company does not allocate corporate expenses
other than interest and compensation and benefits to its various
activities.
F-16
<PAGE>
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1996, 1995 and 1994 and (unaudited)
September 30, 1997 and 1996
(13) Subsequent Events
The shareholders of Premier Mortgage Corp. intend to exchange all of their
outstanding shares of common stock of Premier Mortgage Corp. for 2,500,000
shares of PMCC Financial Corp., a newly formed Delaware holding company.
Following the exchange of shares, PMCC Financial Corp. is contemplating an
initial public offering of 1,250,000 shares of its common stock.
Prior to the exchange, the Company will declare a distribution to the
existing shareholders in an amount equal to a portion of its undistributed S
corporation earnings that will result in the Company's shareholders' equity
equaling $1.7 million at the date of the initial public offering. Such
distributions will be payable as follows: (i) $1 million will be payable out of
the proceeds of the initial public offering, and (ii) the balance will be
payable in a promissory note bearing an interest rate of 10% per annum, payable
in four equal quarterly installments of principal and interest. The final
payment is due within one year of the date of the consummation of the Company's
contemplated initial public offering.
In April 1997, the Company adopted and its Board of Directors ratified a
qualified stock option plan which allows certain personnel employed by the
Company to be given an opportunity to acquire a stake in the growth of the
Company via the granting of stock options. As of September 30, 1997, options to
purchase 18.75 common shares were granted at an exercise price of $120,000 per
share. To date, no such options were exercised. Upon the exchange of shares
discussed in the second preceding paragraph, the Company intends to exchange
the outstanding options for options to purchase 375,000 common shares of PMCC
Financial Corp. at an exercise price of $6 per share.
In contemplation of the initial public offering, upon the exchange of
shares, the Company will terminate its S corporation status. As a result, PMCC
Financial Corp. and the Company will be fully subject to federal and state
income taxes (see also note 13).
(14) Unaudited Pro Forma Information
The pro forma financial information has been presented to show what the
significant effects on the historical financial position might have been had
the distribution of previously undistributed S corporation earnings and the
termination of the Company's S corporation status occurred as of September 30,
1997, in contemplation of the exchange of shares described in note 12, and to
show what the significant effects on the historical results of operations might
have been had the Company not been treated as an S corporation for income tax
purposes for the year ended December 31, 1996 and for the nine months ended
September 30, 1997. In addition, the historical results of operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997 have
been adjusted to reflect a pro forma increase in officer compensation expense
pursuant to certain proposed employment agreements.
Pro forma net income and pro forma balance sheet - pro forma net income
represents the results of operations adjusted to reflect the Company's income
tax status as a C corporation, using a pro forma income tax rate of 42.1%, for
the year ended December 31, 1996, and 41.25% for the nine months ended
September 30, 1997. The pro forma balance represents the balance sheet as of
September 30, 1997 adjusted to give effect to (i) the establishment of a
$1,393,118 distribution payable for previously undistributed S corporation
earnings which are intended to be distributed, and (ii) the establishment of
$965,000 of deferred tax liabilities that would have been recorded had the
Company's S corporation status been terminated as of September 30, 1997. The
amounts of the distribution payable and deferred tax liability to be recorded
will be dependent upon the amount of undistributed S corporation earnings and
upon the temporary differences between tax and book accounting existing,
respectively, at the date of termination of the Company's S corporation status.
The principal components of the Company's net deferred tax liabilities relate
to the recognition of income on the cash basis for tax purposes.
Pro forma net income per share has been computed by dividing pro forma net
income by the 2,500,000 shares of common stock of PMCC Financial Corp. to be
received in exchange for the Company's shares adjusted for the estimated number
of shares to be sold by PMCC Financial Corp. to fund the initial $1 million
distribution of previously undistributed S corporation earnings and, after
April 1997, for common stock equivalents.
The pro forma balance sheet at September 30, 1997 does not reflect the
sale of shares in the initial public offering.
F-17
<PAGE>
==============================================================================
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the shares of Common Stock offered hereby,
nor does it constitute an offer to sell or a solicitation of any offer to buy
any of the securities offered hereby to any person in any jurisdiction in which
it is unlawful to make such an offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstance create
any implication that the information contained herein is correct as of any date
subsequent to the date hereof or that there has been no change in the affairs
of the Company since such date.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ........................................... 3
Risk Factors ................................................. 7
Reorganization and Termination of
S Corporation Status ...................................... 17
Use of Proceeds .............................................. 18
Dividend Policy .............................................. 18
Dilution ..................................................... 19
Capitalization ............................................... 20
Selected Consolidated Financial Data ......................... 21
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................................ 22
Business ..................................................... 30
Management ................................................... 42
Certain Transactions ......................................... 47
Principal Stockholders ....................................... 49
Description of Securities .................................... 50
Shares Eligible for Future Sale .............................. 52
Underwriting ................................................. 53
Legal Matters ................................................ 55
Experts ...................................................... 55
Available Information ........................................ 55
Index to Financial Statements ................................ F-1
Until March 15, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters with respect to their unsold allotments or
subscriptions.
==============================================================================
<PAGE>
==============================================================================
[GRAPHIC OMITTED]
1,250,000 Shares
of Common Stock
----------------------------------------
Prospectus
----------------------------------------
COLEMAN AND COMPANY
SECURITIES, INC.
ISG CAPITAL MARKETS, LLC
February 17, 1998
==============================================================================
