3
Form 10-Q Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number: 1-7614
-----------------------------
PMCC FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3404072
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3 Expressway Plaza
Roslyn Heights, N.Y. 11577
(Address of Principal Executive Offices and Zip Code)
(516) 625-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01 per
share, as of November 10, 1999: 3,724,800 shares.
<PAGE>
PMCC FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No
<S> <C>
Part I - Financial Information
Item 1. Unaudited Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1999 and 1998 3
Nine months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Financial Condition (Unaudited)
September 30, 1999 and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
Part II - Other Information 18
Signatures 19
Exhibits 20
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
PMCC FINANCIAL CORP. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
---- ----
Revenues:
<S> <C> <C>
Sales of residential rehabilitation properties $10,743,477 $8,805,765
Gains on sale of mortgage loans, net 3,730,304 5,408,552
Interest earned 1,301,292 1,633,472
--------- ---------
15,775,073 15,847,789
--------- ---------
Expenses:
Costs of sales, residential rehabilitation properties 9,610,539 8,084,440
Compensation and benefits 3,419,097 3,217,256
Interest expense 1,291,761 1,743,598
Other general and administrative 1,439,622 1,192,740
--------- ---------
15,761,019 14,238,034
--------- ---------
Income before income tax expense 14,054 1,609,755
Income tax expense 6,000 660,000
----- -------
Net Income $8,054 $949,755
====== ========
Net income per share of common stock-basic $0.002 $ 0.25
====== ======
Net income per share of common stock-diluted $0.002 $ 0.25
====== ======
Weighted average number of shares and
share equivalents outstanding-basic 3,724,800 3,747,307
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,795,046 3,781,797
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
---- ----
Revenues:
<S> <C> <C>
Sales of residential rehabilitation properties $29,325,884 $25,564,935
Gains on sale of mortgage loans, net 11,617,022 12,170,359
Interest earned 3,657,636 3,942,966
--------- ---------
44,600,542 41,678,260
--------- ---------
Expenses:
Costs of sales, residential rehabilitation properties 26,565,987 23,503,098
Compensation and benefits 9,023,859 7,687,956
Interest expense 3,490,676 4,117,172
Other general and administrative 3,803,102 2,861,285
--------- ---------
42,883,624 38,169,511
--------- ---------
Income before income tax expense 1,716,918 3,508,749
Income tax expense 704,000 2,255,000
------- ---------
Net Income $1,012,918 $1,253,749
========== ==========
Pro forma information: $3,508,749
Provision for pro forma income taxes (1,439,000)
-----------
Pro forma net income $2,069,749
==========
Net income/pro forma net income per share of common stock-basic
$0.27 $0.59
===== =====
Net income/pro forma net income per share of common
stock-diluted $0.27 $0.58
===== =====
Weighted average number of shares and
share equivalents outstanding-basic 3,724,800 3,530,220
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,764,450 3,583,633
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $650,363 $3,596,002
Receivable from sales of loans 7,679,374 20,789,470
Mortgage loans held for sale, net 53,492,347 67,676,679
Mortgage loans held for investment, net 4,539,990 1,717,228
Interest and other receivables, net 2,550,337 1,208,454
Residential rehabilitation properties 14,720,931 16,491,514
Furniture & equipment, net 1,155,270 828,226
Prepaid expenses and other assets 765,727 501,587
------- -------
Total assets $85,554,339 $112,809,160
=========== ============
Liabilities and shareholders' equity Liabilities:
Notes payable-principally warehouse lines of credit $67,460,345 $94,673,739
Due to affiliates - 1,187,998
Distribution payable - 277,700
Accrued expenses and other liabilities 4,000,502 3,637,149
--------- ---------
Total liabilities 71,460,847 99,776,586
---------- ----------
Shareholders' equity
Common stock, $.01 par value: 10,000,000 shares authorized;
3,750,000 issued 37,500 37,500
Additional paid-in capital 10,894,033 10,846,033
Retained earnings 3,323,605 2,310,687
Treasury stock, at cost (25,000 shares) (161,646) (161,646)
--------- ---------
Total shareholders' equity 14,093,492 13,032,574
---------- ----------
Total liabilities and shareholders' equity $85,554,339 $112,809,160
=========== ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ..................................................................... $ 1,012,918 $ 1,253,749
Adjustments to reconcile net income to net cash used in operating
activities:
Residential rehabilitation properties (exclusive of cash paid directly
to/by independent contractors):
Contractual fees received ........................................... (2,759,897) (2,061,837)
Proceeds from sales of properties ................................... 29,325,884 25,564,935
Costs of properties acquired ........................................ (24,795,404) (27,729,375)
Depreciation and amortization ......................................... 196,894 77,194
Increase in interest and other receivables ........................... (1,341,883) (937,619)
Decrease (increase) in mortgage loans held for sale ................... 11,361,570 (45,732,625)
Decrease in receivable from sales of loans ............................ 13,110,096 20,140,959
Increase in prepaid expenses and other assets ......................... (264,140) (73,174)
Decrease in due to affiliates ......................................... (1,187,998) (881,284)
Increase in accrued expenses and other liabilities .................... 363,353 2,934,450
------------ ------------
Net cash provided by (used in) operating activities ................... 25,021,393 (27,444,627)
------------ ------------
Cash flows from investing activities:
Acquisition of assets of Prime Mortgage Corp. ................... (250,000) --
Purchase of furniture and equipment ................................... (225,938) (530,456)
------------ ------------
Net cash used in investing activities .......................................... (475,938) (530,456)
------------ ------------
Cash flows from financing activities:
Distributions to S corporation shareholders, net of
distribution payable .................................................. (277,700) (2,134,971)
Net proceeds from sale of common stock ................................ -- 9,183,325
Net decrease in notes payable-shareholder ............................. -- (293,163)
Net borrowing installment loan ........................................ -- 243,476
Purchases of treasury stock ........................................... -- (89,367)
Net (decrease) increase in notes payable-warehouse lines of credit..... (27,213,394) 22,683,803
------------ ------------
Net cash (used in) provided by financing activities ............................ (27,491,094) 29,593,103
------------ ------------
Net (decrease) increase in cash and cash equivalents ........................... (2,945,639) 1,618,020
Cash and cash equivalents at beginning of period ............................... 3,596,002 1,713,405
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 650,363 $ 3,331,425
============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ............................................................ $ 3,487,515 $ 3,895,446
============ ============
Income taxes ........................................................ $ 504,647 $ 551,640
============ ============
Loans transferred from held for sale to held for investment ......... $ 2,822,762 $ --
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, which are, in the opinion of management necessary
for a fair presentation of PMCC Financial Corporation's and subsidiaries
("the Company") financial condition as of the dates indicated and the
results of operations for the periods shown. In preparing the accompanying
condensed consolidated financial statements, management is required to make
estimates and assumptions that reflect the reported amounts of assets and
liabilities as of the date of the condensed consolidated statements of
financial condition and of income and expenses for the periods presented in
the condensed consolidated statements of operations. The results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
rules and regulations of the Securities and Exchange Commission.
These unaudited condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1998.
Certain reclassifications have been made to conform the prior period's
presentation to the current presentation.
2. Initial Public Offering
On February 18, 1998 the shareholders of Premier Mortgage Corp. ("Premier")
exchanged all of their outstanding common shares of Premier for 2.5 million
common shares of the Company. Following this exchange, the Company
completed an initial public offering of 1.25 million common shares at a
price of $9 per share. The Company received gross proceeds of $11.25
million and net proceeds of approximately $9.2 million.
At the time of the exchange, the Company agreed to make a cash distribution
to existing shareholders of $2.7 million which was equal to a portion of
the Company's undistributed subchapter S corporation earnings.
Approximately $1.9 million of the distribution was paid during the quarter
ended March 31, 1998, of which $1 million was from the proceeds of the
initial public offering. The balance of the distribution was paid in
installments including interest on the undistributed balance at 10% per
annum through February 18, 1999. The remaining undistributed subchapter S
Corporation earnings of approximately $1.0 million were reclassified from
retained earnings to additional paid in capital.
3. Income Taxes
Prior to February 18, 1998, certain of the Company's subsidiaries had
elected to be treated as S corporations for both federal and state income
tax purposes. As a result, the income of the subsidiaries through February
18, 1998 was taxed directly to the individual shareholders. On February 18,
1998, in conjunction with the Company's initial public offering, the S
corporation elections were terminated and the Company's subsidiaries became
C corporations for federal and state income tax purposes and, as such,
became subject to federal and state income taxes on their taxable income
for the periods after February 18, 1998. Therefore, the provision for
income taxes for the nine months ended September 30, 1998 includes a
provision for deferred income taxes of $1,081,000 related to the temporary
differences existing at the termination of the S corporation elections, and
pro forma net income for the nine months ended September 30, 1998 include
pro forma income taxes as if the Company had been taxed as a C corporation
throughout the periods.
4. Earnings Per Share of Common Stock
Basic EPS is determined by dividing net income for the period by the
weighted average number of common shares outstanding during the same
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
which would then share in the earnings of the Company. The additional
number of shares included in the calculation of diluted EPS arising from
issued stock options was 39,650 shares and 53,413 shares, respectively, for
the nine months ended September 30, 1999 and 1998 and 70,246 and 31,797
shares, respectively, for the three months ended September 30, 1999 and
1998.
Actual earnings per share data for periods prior to February 18, 1998 have
not been presented in the accompanying unaudited condensed consolidated
statement of operations because the Company was not a public company.
Actual earnings per share data for the periods February 18, 1998 to March
31, 1998 and February 18, 1998 to September 30, 1998 have not been
presented in the accompanying unaudited condensed consolidated statement of
operations because management believes that such data would not be
meaningful given the relatively short period and the impact of the
recognition of a deferred tax liability in connection with the change in
tax status. Therefore, the earnings per share data presented for the nine
months ended September 30, 1998 is based on proforma net income.
5. Supplemental Information
The Company's operations consist of two principal activities (a) mortgage
banking and (b) funding the purchase, rehabilitation and resale of
residential real estate. The following table sets forth-certain information
concerning these activities (in thousands):
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1999 1998
-------------
Revenues:
<S> <C> <C>
Residential rehabilitation properties ...................................... $29,326 $25,565
Mortgage banking ........................................................... 15,275 16,113
------- -------
$44,601 $41,678
======= =======
Less: (1)
Expenses allocable to residential rehabil-
itation properties (cost of sales, interest
expense and compensation and benefits) ................................... 28,417 24,638
Expenses allocable to mortgage banking
(all other) ............................................................. 14,467 13,531
------- -------
$42,884 $38,169
======= =======
Operating Profit:
Residential rehabilitation properties .................................... 909 927
Mortgage banking ......................................................... 808 2,582
------- -------
$ 1,717 $ 3,509
======= =======
September 30, December 31,
1999 1998
--------------
Identifiable Assets:
Residential rehabilitation properties .................................... $ 14,721 $ 16,492
Mortgage banking ......................................................... 70,833 96,317
------- -------
$ 85,554 $112,809
======== ========
<FN>
(1) In managing its business, the Company does not allocate corporate expenses
other than interest and compensation and benefits to its various activities.
</FN>
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q may contain forward-looking statements, which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate," and other expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as the result
of new information, future events or otherwise. The following factors could
cause actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of various
segments of the economy and demographics of the Company's lending markets; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and cost of funds; (4) federal and state regulation of the Company's
mortgage banking operations; (5) competition within the mortgage banking
industry and (6) the potential adverse effects of Y2K (year 2000) (7) the
Company's management of rapid growth and expansion.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
General Overview
In July 1999, the Company completed its acquisition for $250,000 of the
assets of Prime Mortgage Investors, Inc. ("Prime") and assumed certain lease
obligations of Prime. The Company now operates three primarily wholesale loan
offices in Florida. The purchase price approximated the fair value of assets
acquired and has been entirely allocated to software, furniture and equipment
and other assets. At the time of the acquisition, the Company kept the Prime
branches intact in order to facilitate an orderly transition without any loss of
loan originations although the Company felt there was excessive costs in both
the production and overhead areas. At the end of the quarter ended September 30,
1999, the Company has greatly reduced these costs.
As previously reported, due to continuing adverse conditions in the
sub-prime (BCD) market, the Company closed its Roslyn, New York sub-prime
division during the second quarter of 1999 and transferred its remaining
operations to the New Jersey office. However, while the Company's conservative
posture on these loans continued throughout the third quarter and has reduced
loss exposure to almost zero, sub-prime loan originations have been reduced by
approximately 90% from the prior year.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
-------------------
<S> <C> <C>
Sales of residential rehabilitation properties $10,743,477 $ 8,805,765
Gains on sales of mortgage loans, net ........ 3,730,304 5,408,552
Interest earned .............................. 1,301,292 1,633,472
----------- -----------
Total Revenue ................................ $15,775,073 $15,847,789
=========== ===========
</TABLE>
Revenues from the sale of residential rehabilitation properties increased
$1.9 million, or 22.0% to $10.7 million for the three months ended September 30,
1999 from $8.8 million for the three months ended September 30, 1998. This
increase was primarily the result of the increase in the number of residential
rehabilitation properties sold to 62 for the three months ended September 30,
1999 from 58 for the three months ended September 30, 1998 and increased
interest income.
Gains on sales of mortgage loans decreased $ 1.7 million, or 31.0 %, to $
3.7 million for the three months ended September 30, 1999 from $5.4 million for
the three months ended September 30, 1998. This decrease was primarily due to a
90.2% decrease in sub-prime loan originations partly offset by an 11.0% increase
in conventional and FHA/VA loan originations. Mortgage loan originations were
$166.9 million and $170.4 million for the three months ended September 30, 1999
and 1998, respectively. In past years, sub-prime loans were generally sold at a
higher per loan margin than conventional loans. Replacing the sub-prime loan
volume with conventional loans reduced gains by approximately $800,000 for the
quarter ended September 30, 1999 compared to the quarter ended September 30,
1998. Additionally, in the quarter ended September 30, 1999, the Company
continued to sell a substantial amount of sub-prime loans in the secondary
market at par or slightly below as opposed to a normal markup of these loans at
between 4 and 6 points above par. The Company estimates that the above inventory
losses resulted in losses of approximate $180, 000 for the quarter and are
non-recurring. For the three months ended September 30, 1999, approximately 53%
of the Company's mortgage originations were derived from its retail mortgage
operations and approximately 47% from its wholesale operations. The following
table summarizes the Company's mortgage originations (in 000's):
Three Months Ended September 30,
--------------------------------
1999 1998
---------------
Conventional $119,129 $107,131
FHA/VA ..... 45,598 41,283
BCD ........ 2,148 21,980
-------- --------
Total ...... $166,875 $170,394
======== ========
Although there can be no assurance thereof, the Company expects mortgage
originations to increase due to the expansion to new geographic areas and new
Internet technology, which may result in additional gains on sales of mortgage
loans in future periods.
Interest earned decreased $0.3 million, or 20.3%, to $1.3 million for the
three months ended September 30, 1999 from $1.6 million for the three months
ended September 30, 1998. This decrease was primarily due to decreased subprime
mortgage activity. Such loans generally have higher interest rates and are held
for sale longer than conventional mortgages.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Cost of sales - residential rehabilitation properties $ 9,610,539 $ 8,084,440
Compensation and benefits ........................... 3,419,097 3,217,256
Interest expense .................................... 1,291,761 1,743,598
Other general and administrative .................... 1,439,622 1,192,740
----------- -----------
Total expenses ...................................... $15,761,019 $14,238,034
=========== ===========
</TABLE>
Cost of sales on residential rehabilitation properties increased $1.5
million, or 18.9%, to $9.6 million for the three months ended September 30, 1999
from $8.1 million for the three months ended September 30, 1998. This increase
was primarily due to the increase in the number of properties purchased,
rehabilitated and sold.
Compensation and benefits increased $0.2 million, or 6.3%, to $3.4 million
for the three months ended September 30, 1999 from $3.2 million for the three
months ended September 30,1998. This increase was primarily due to increased
salaries due to the geographic expansion, partially offset by a reduction in the
employees in the sub-prime loan area. Total personnel increased to 184 employees
at September 30, 1999 from 127 at September 30, 1998.
Interest expense decreased $0.4 million, or 25.9%, to $1.3 million for the
three months ended September 30, 1999 from $1.7 million for the three months
ended September 30, 1998. This decrease was primarily attributable to the
decrease in sub-prime loan originations funded through the Company's warehouse
lines of credit.
Other general and administrative expense increased $0.2 million, or 20.7%,
to $1.4 million for the three months ended September 30, 1999 from $1.2 million
for the three months ended September 30, 1998. This increase was primarily due
to increased expenses incurred in connection with the geographic growth in the
operations of the Company including rent and facilities expense, telephone and
marketing.
Although there can be no assurance thereof, the Company believes that the
expected increase in mortgage origination volume and residential rehabilitation
activities may result in increased expenses. These increases may be partly
offset by increased efficiency of operations primarily through anticipated cost
reductions and the expected installation in the first quarter of 2000 of a new
front-end software system and a laptop loan system.
Net income decreased $942,000 or 99.2%, to $8,000 for the three months
ended September 30, 1999 from $950,000 for the three months ended September 30,
1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Nine months Ended September 30,
-------------------------------
1999 1998
---- ----
Sales of residential rehabilitation properties $29,325,884 $25,564,935
Gains on sales of mortgage loans, net ........ 11,617,022 12,170,359
Interest earned .............................. 3,657,636 3,942,966
----------- -----------
Total Revenue ................................ $44,600,542 $41,678,260
=========== ===========
Revenues from the sale of residential rehabilitation properties increased
$3.7 million, or 14.7%, to $29.3 million for the nine months ended September 30,
1999 from $25.6 million for the nine months ended September 30, 1998. This
increase was primarily the result of the increase in the number of residential
rehabilitation properties sold to 178 for the nine months ended September 30,
1999 from 167 for the nine months ended September 30, 1998.
Gains on sales of mortgage loans decreased $0.6 million, or 4.5%, to $11.6
million for the nine months ended September 30, 1999 from $12.2 million for the
nine months ended September 30, 1998. This decrease was primarily due to a 78.4%
decrease in sub-prime loan originations along with losses incurred in selling
the remaining sub-prime portfolio in a depressed sub-prime market partially
offset by a 23.9% increase in conventional and FHA/VA loans originated. Mortgage
loan originations were $449.2 million and $410.5 million for the nine months
ended September 30, 1999 and 1998, respectively. For the nine months ended
September 30, 1999, approximately 56% of the Company's mortgage originations
were derived from its retail mortgage operations and approximately 44% from its
wholesale operations. The following table summarizes the Company's mortgage
originations (in 000's):
Nine months Ended September 30,
-------------------------------
1999 1998
---- ----
Conventional $300,619 $262,634
FHA/VA ..... 136,037 89,686
BCD ........ 12,559 58,181
-------- --------
Total ...... $449,215 $410,501
======== ========
Although there can be no assurance thereof, the Company expects mortgage
originations to increase due to the expansion to new geographic areas and new
Internet technology, which may result in additional gains on sales of mortgage
loans in future periods.
Interest earned decreased $0.2 million, or 7.2%, to $3.7 million for the
nine months ended September 30, 1999 from $3.9 million for the nine months ended
September 30, 1998. This decrease was primarily due to decreased sub-prime
mortgage activity. Such loans generally have higher interest rates and are held
for sale longer than conventional mortgages.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1999 1998
-----------------
<S> <C> <C>
Cost of sales - residential rehabilitation properties $26,565,987 $23,503,098
Compensation and benefits ........................... 9,023,859 7,687,956
Interest expense .................................... 3,490,676 4,117,172
Other general and administrative .................... 3,803,102 2,861,285
----------- -----------
Total expenses ...................................... $42,883,624 $38,169,511
=========== ===========
</TABLE>
Cost of sales on residential rehabilitation properties increased $3.1
million, or 13.0%, to $26.6 million for the nine months ended September 30, 1999
from $23.5 million for the nine months ended September 30, 1998. This increase
was primarily due to the increase in the number of properties purchased,
rehabilitated and sold.
Compensation and benefits increased $1.3 million or 17.4%, to $9.0 million
for the nine months ended September 30, 1999 from $7.7 million for the nine
months ended September 30,1998. This increase was primarily due to increased
sales salaries and commission from mortgage loan originations as well as
increased salaries for the Company's geographic expansion.
Interest expense decreased $0.6 million, or 15.2%, to $3.5 million for the
nine months ended September 30, 1999 from $4.1 million for the nine months ended
September 30, 1998. This decrease was attributable to the decrease in subprime
mortgage originations which are held longer in the Company's warehouse lines of
credit, partially offset by higher loan origination volume and higher borrowing
rates.
Other general and administrative expense increased $0.9 million, or 32.9%,
to $3.8 million for the nine months ended September 30, 1999 from $2.9 million
for the nine months ended September 30, 1998. This increase was primarily due to
increased expenses incurred in connection with the geographic growth in the
operations of the Company including rent and facilities expense, telephone and
marketing.
Although there can be no assurance thereof, the Company believes that the
expected increase in mortgage origination volume and residential rehabilitation
activities may result in increased expenses. These increases may be partly
offset by increased efficiency of operations primarily through anticipated cost
reductions and the expected installation in the first quarter of 2000 of a new
front-end software system and a laptop loan system.
Net income decreased $0.2 million or 19.2% to $1.0 million from $1.2
million for the nine months ended September 30, 1999.
Liquidity and Capital Resources
The Company's principal financing needs consist of funding mortgage loan
originations and residential rehabilitation properties. To meet these needs, the
Company currently relies on borrowings under warehouse lines of credit and cash
flow from operations. The amount of outstanding borrowings under warehouse lines
of credit at September 30, 1999 was $58 million. The mortgage loans and
residential rehabilitation properties, funded with the proceeds from such
borrowings, secure warehouse lines of credit.
On August 7, 1998, the Company entered into a Senior Secured Credit
Agreement with Chase Bank of Texas, National Association and PNC Bank (the
"Warehouse Line"). The Warehouse Line provides a warehouse line of credit of
$120 million ($90 million committed at August 11, 1998) for its mortgage
originations and residential rehabilitation purchases. The Warehouse Line is
secured by the mortgage loans and residential rehabilitation purchases funded
with the proceeds of such borrowings. The Company has also pledged the stock of
its residential rehabilitation subsidiaries as additional collateral. Borrowings
for residential rehabilitation purchases are guaranteed by Ronald Friedman
(President, Chief Executive Officer and a Director of the Company) and Robert
Friedman (Chairman of the Board of Directors, Chief Operating Officer, Secretary
and Treasurer of the Company). The interest rate charged for borrowings under
the Warehouse Line is LIBOR plus 1 1/4 % - 2 1/4% depending upon the collateral
type. The Warehouse Line expires on December 24, 1999.
The warehouse lines of credit contains certain covenants limiting
indebtedness, liens, mergers, changes in control and sales of assets and
requires the Company to maintain minimum net worth and other financial ratios.
The Company expects to be able to renew or replace the Warehouse Line and its
other warehouse line of credit when the current terms expire.
On February 18, 1998 the Company completed an initial public offering of
new shares of common stock at a price of $9 per share. The Company received
gross proceeds of $11.25 million and net proceeds of approximately $9.2 million.
The proceeds from this offering were used for funding mortgage originations and
residential rehabilitation properties, working capital and an S Corporation
distribution.
Net cash substantially provided by operations for the nine months ended
September 30, 1999 was $25.0 million. The funds were principally provided by a
$11.4 million net decrease in mortgage loans held for sale and a $13.1 million
net decrease in receivable from sales of loans. These funds were used to finance
a decrease in warehouse borrowings of $27.2 million, decreases in loans to
affiliates and distributions payable to stockholders, the Prime Mortgage
acquisition and the purchase of state of the art front end software which is
expected to be functional in January 2000.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 applies to all
entities and is effective for fiscal quarters of fiscal years beginning after
June 15, 2000. This statement establishes accounting and auditing standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. This statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133". SFAS No. 137 delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities ", for one year, to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The delay applies to
quarterly and annual financial statements. SFAS No. 137 is effective upon
issuance and does not require restatement of prior periods. Management of the
Company currently believes the implementation of SFAS No. 133 will not have a
material impact on the Company's financial condition or results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Held for Sale by a Mortgage Banking Enterprise"
("SFAS No.134"). SFAS No. 134 conforms the accounting for securities retained
after securitization of mortgage loans by a mortgage banking enterprise with the
accounting for securities retained after the securizitation of other types of
assets by a non-mortgage banking enterprise. SFAS No. 134 is effective for the
first quarter beginning after December 31, 1998. Management of the Company
believes the implementation of SFAS No. 134 does not have a material impact on
the Company's financial condition or results of operations.
Year 2000 Compliance
The Company is currently in the process of updating its information
technology infrastructure for the Year 2000 ("Y2000") compliance. The Company
has contacted the venders of its information systems and has been informed that
these systems are Y2000 compliant. The Company's existing workstations and
fileservers are substantially Y2000 compliant and those workstations that are
not Y2000 compliant will be replaced during 1999. The Company does not believe
that the cost to modify its information technology infrastructure to be material
to its financial condition or results of operations nor does the Company
anticipate any material disruption of its operations as a result of a failure by
the Company to be Compliant. However, there can be no assurance that there will
not be a delay in, or increased costs, associated with the need to address Y2000
issues. The Company also relies, directly and indirectly, on the business, such
as third party service providers, creditors, financial institutions and
government agencies. Even if the Company's computer systems are not materially
adversely affected by Y2000 issues, the Company's business and operations could
me materially adversely affected by disruptions in the operations of other
entities with which the Company interacts.
Item 3. Quantitative and Qualitative Disclosure about Market Risks.
In management's opinion, there has not been a material change in market
risk from December 31, 1998.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant is a defendant in certain litigation arising in the
normal course of its business. In the opinion of the Registrant, any potential
liability with respect to such legal actions will not, individually or in the
aggregate, be material to the Registrant's financial position, liquidity or
future results of operations.
Item 2. Changes in Securities And Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On September 7, 1999, Robert Friedman resigned as Chairman of the Board
of Directors and was replaced as Chairman by Ronald Friedman, the Company's
President and Chief Executive Officer. Keith Haffner, the Company's Executive
Vice President, replaced him on the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedules
(b) The Company filed a Form 8-K on September 15, 1999 disclosing that Mr.
Robert Friedman was no longer an officer and director of the Company as
described above in Item 5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMCC FINANCIAL CORP.
(Registrant)
By /s/ Ronald Friedman
-------------------
Ronald Friedman
Chairman, President and Chief Executive Officer
By /s/ Stephen J. Mayer
--------------------
Stephen J. Mayer
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 15, 1999
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