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 June 30, 2000
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 August 8, 2000: 3,707,000 shares.
<PAGE>
PMCC FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS
-----------------
Page No
-------
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 2000 and 1999 3
Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Financial Condition (Unaudited) 5
June 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows (Unaudited) 6
Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-22
and Results of Operations
Part II - Other Information 23-24
Signatures 25
Exhibit Index
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
PMCC FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Sales of residential rehabilitation properties $ 4,528,914 $ 10,037,429
Gains on sale of mortgage loans, net 563,448 4,078,815
Loss on sales of delinquent loans (862,000) --
Interest earned 428,266 1,036,909
------------ ----------
4,658,628 15,153,153
Expenses:
Costs of sales, residential rehabilitation properties 4,715,422 9,151,254
Compensation and benefits 1,458,754 2,874,131
Interest expense 376,225 1,018,959
Expenses resulting from Investigation (Note 7) 345,644 --
Other general and administrative 1,050,707 1,207,836
------------ ----------
7,946,752 14,252,180
(Loss) income before income tax (benefit) expense (3,288,124) 900,973
Income tax (benefit) expense (52,188) 369,000
------------ ----------
Net (loss) income $ (3,235,936) $ 531,973
============ ============
Net (loss) income per share of common stock-basic $ (0.87) $ 0.14
============ ==========
Net (loss) income per share of common stock-diluted $ (0.87) $ 0.14
============ ==========
Weighted average number of shares and
share equivalents outstanding-basic 3,707,000 3,724,800
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,707,000 3,759,146
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Sales of residential rehabilitation properties $ 14,451,115 $ 18,582,407
Gains on sale of mortgage loans, net 1,650,433 7,886,718
Loss on sales of delinquent loans (900,000) --
Interest earned 999,152 2,356,344
------------ ----------
16,200,700 28,825,469
Expenses:
Costs of sales, residential rehabilitation properties 14,188,353 16,955,448
Compensation and benefits 3,350,558 5,604,762
Interest expense 1,072,179 2,198,915
Expenses resulting from Investigation (Note 7) 1,490,900 --
Other general and administrative 2,083,665 2,363,480
--------- ---------
22,185,655 27,122,605
---------- ----------
(Loss) income before income tax (benefit) expense (5,984,955) 1,702,864
Income tax (benefit) expense (1,161,435) 698,000
------------ ----------
Net (loss) income $ (4,823,520) $ 1,004,864
============ ============
Net (loss) income per share of common stock-basic $ (1.30) $ 0.27
============ ==========
Net (loss) income per share of common stock-diluted $ (1.30) $ 0.27
============ ==========
Weighted average number of shares and
share equivalents outstanding-basic 3,707,000 3,724,800
========= =========
Weighted average number of shares and
share equivalents outstanding-diluted 3,707,000 3,759,146
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
Unaudited Audited
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 57,437 $ 214,957
Restricted cash -- 500,000
Mortgage loans held for sale, net 14,739,138 36,666,397
Mortgage loans held for investment, net 1,225,229 3,112,179
Receivable from sales of loans -- 4,300,279
Accrued interest and other receivables, net 2,211,914 1,521,756
Residential rehabilitation properties, net 2,764,137 15,189,753
Furniture, fixtures & equipment, net 1,065,912 1,169,327
Prepaid expenses and other assets 847,819 870,875
------------ ----------
Total assets $ 22,911,586 $ 63,545,523
============ ============
Liabilities and shareholders' equity
Liabilities:
Notes payable-principally warehouse lines of credit $ 15,816,759 $ 50,584,370
Deferred income taxes -- 333,000
Accrued expenses and other liabilities 785,941 1,531,374
------------ ----------
Total liabilities 16,602,700 52,448,744
---------- ----------
Shareholders' equity
Common stock 37,500 37,500
Additional paid-in capital 10,952,910 10,917,283
Retained (deficit) earnings (4,427,053) 396,467
Treasury stock (254,471) (254,471)
-------- --------
Total shareholders' equity 6,308,886 11,096,779
--------- ----------
Total liabilities and shareholders' equity $ 22,911,586 $ 63,545,523
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,823,520) $ 1,004,864
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Residential rehabilitation properties (exclusive of cash paid
directly to/by independent contractors):
Contractual fees received (262,762) (1,626,959)
Proceeds from sales of properties 14,451,115 18,582,407
Costs of properties acquired (1,762,737) (16,757,616)
Depreciation and amortization 180,741 124,675
Increase in interest and other receivables (690,158) (585,785)
Decrease in mortgage loans held for sale and investment, net 23,814,209 21,752,245
Decrease in receivable from sales of loans 4,300,279 14,202,325
Decrease (increase) in prepaid expenses and other assets 23,056 (467,860)
Decrease in deferred taxes payable (333,000) (307,000)
(Decrease) increase in accrued expenses and other liabilities (745,433) 622,481
-------- -------
Net cash provided by operating activities 34,151,790 36,543,777
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (41,699) (86,023)
------- -------
Net cash used in investing activities (41,699) (86,023)
------- -------
Cash flows from financing activities:
Net decrease in notes payable-warehouse lines of credit (34,767,611) (35,073,774)
Net decrease in restricted cash 500,000 --
Net decrease in due to affiliates -- (1,187,998)
Distributions to S corporation shareholders -- (277,700)
---------- --------
Net cash used in financing activities (34,267,611) (36,539,472)
----------- -----------
Net increase (decrease) in cash and cash equivalents (157,520) (81,718)
Cash and cash equivalents at beginning of period 214,957 3,596,002
------- ---------
Cash and cash equivalents at end of period $ 57,437 $ 3,514,284
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,758,115 $ 2,270,757
============ ============
Income taxes $ 11,190 $ 55,000
============ ============
Loans transferred from mortgage loans held for sale to held for
Investment, net $ 470,100 $ 290,737
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements included herein
reflect all adjustments, which are, in the opinion of management necessary
for a fair presentation of the Company's financial condition as of the
dates indicated and the results of operations for the periods shown. All
such adjustments are of a normal recurring nature. In preparing the
accompanying 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 consolidated statements of financial
condition and of income and expenses for the periods presented in the
consolidated statements of operations. The results of operations for the
three and six months ended June 30, 2000 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 omitted pursuant to rules and regulations of the
Securities and Exchange Commission.
These unaudited 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,
1999.
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 shares of common stock for
2.5 million shares of the Company. Following this exchange, the Company
completed an initial public offering of 1.25 million 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.
At the time of the exchange, the Company agreed to make a cash
distribution to its existing shareholders of $2.7 million which was equal
to a portion of the Company's undistributed S corporation earnings.
Approximately $1.9 million of this distribution was paid during the quarter
ended March 31, 1999 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
The Company accounts for income taxes under the liability method as
required by SFAS No. 109.
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 and warrants was 34,346 shares for both the three and
six months ended June 30, 1999. There was no dilution for either the three
months or six months ended June 30, 2000.
5. Notes Payable
At June 30, 2000 and 1999, substantially all of the mortgage loans held for
sale and investment, receivable from sales of loans and certain residential
rehabilitation properties were pledged to secure notes payable under
warehouse lines of credit agreements. The notes are repaid as the related
mortgage loans or residential rehabilitation properties are sold or
collected.
On February 28, 2000, the Company entered into a Master Repurchase
Agreement that provides the Company with a warehouse facility (the "IMPAC
Line") through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line
provides a committed warehouse line of credit of $20 million for the
Company's mortgage originations only. The IMPAC Line is secured by the
mortgage loans funded with the proceeds of such borrowings. Interest
payable is variable based on the Prime Rate as posted by Bank of America,
N.A. plus 0.50%. The IMPAC Line has no stated expiration date but is
terminable by either party upon written notice.
The Company's warehouse lines of credit with Bank United and GMAC/RFC were
both paid in full in June 2000. The expiration dates for the Company's
warehouse line of credit with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC") is in the process of being extended to
August 15, 2000. The Company anticipates paying down the entire facilities
or renewing the extensions under similar terms and conditions as the
extensions which have previously been granted. The total outstanding on
this line at August 11, 2000 is approximately $1,243,000.
6. Related-Party Transactions
On June 8, 2000, the Company borrowed $275,000 from a company wholly-owned
by Robert Friedman, owner of 17% of the Company's outstanding stock and the
father of Ronald Friedman, the Company's President and CEO currently on a
leave of absence. This loan is evidenced by a promissory note due and
payable in one year. The interest rate on the note is 16% per annum payable
monthly. The note is secured by properties and a mortgage which the Company
owns.
A relative of Ronald Friedman has an economic interest in a rehab partner
for the purchase and sale of rehabilitation properties with a subsidiary of
PMCC. At June 30, 2000, the subsidiary owned $760,100 of properties with
outstanding borrowings on the Company's warehouse lines of $573,800
relating to these properties.
7. Litigation
The U.S. Attorney's Office for the Eastern District of New York ("U.S.
Attorney") is conducting an investigation (the "Investigation") into the
allegations asserted in a criminal complaint against Ronald Friedman, the
former Chairman of the Board, President and Chief Executive Officer of the
Company, and a loan officer formerly employed by the Company. On December
21, 1999, agents of the Office of the Inspector General for the United
States Department of Housing and Urban Development ("HUD") executed search
and arrest warrants at the Roslyn offices of the Company. The warrants were
issued on the basis of a federal criminal complaint ("Complaint"), which
charged that Ronald Friedman and the loan officer knowingly and
intentionally made, uttered or published false statements in connection
with loans to be insured by HUD.
In response to the allegations against the loan officer and Friedman, the
Company engaged the legal services of Dorsey & Whitney LLP to conduct an
internal investigation into the alleged misconduct and to prepare a report
discussing the findings of the internal investigation. As part of this
internal investigation, the Company worked closely and in cooperation with
HUD and the U.S. Attorney. In addition, key employees, including loan
officers, loan processors, underwriters and managers, were interviewed. An
audit also was conducted of over one-third of all 1999 FHA loans in order
to assess whether the files comported with the HUD guidelines for FHA
loans.
A preliminary report detailing Dorsey & Whitney's investigation and
findings was presented to the Company's Board of Directors on April 12,
2000. A written report was issued on April 14, 2000. The report concludes
that while there appears to be support for the allegations leveled at the
former loan officer, there is no evidence that the misconduct alleged in
the complaint was systemic at the Company. Rather, the findings support the
conclusion that the alleged misconduct was an isolated occurrence, not an
institutional practice. The available evidence did not permit Dorsey &
Whitney to reach a definitive conclusion concerning the charges pending
against Ronald Friedman. The investigation, comprised of interviews with
PMCC employees and an extensive review of mortgage loan files, revealed no
independent evidence tending to support the allegations against Friedman
contained in the criminal complaint.
While the Company believes that it has not committed any wrongdoing, it
continues to cooperate fully with the U.S. Attorney's Office and HUD.
However, it cannot predict the duration of the Investigation or its
potential outcome. Although the Company does not anticipate being charged
in connection with this investigation, in the event that the Company was
charged, it intends to vigorously defend its position. While the Company
does not anticipate its occurrence, in the event that it was to lose its
ability to originate and sell FHA loans as result of the Investigation, the
Company does not believe that the financial effect on the Company would be
material. The Company originates approximately 7% of its current loan
volume through FHA products.
As a result of this investigation, the Company incurred $1.491 million and
$346,000 of direct expenses for the six months and three months ended June
30, 2000, respectively. These expenses include legal and professional fees
incurred in connection with the internal investigation of the Company,
criminal defense attorneys and negotiations of warehouse lines of credit
amendments. Also included in these expenses are bank fees relating to
granting amendments to the Bank United line of credit and bonuses paid to
the Company's officers and employees.
8. Subsequent Event
On August 2, 2000, the Company announced that Internet Business's
International, Inc. ("IBUI") is purchasing all 2,500,000 shares of PMCC
held by Ronald and Robert Friedman in a private transaction. IBUI is an
internet holding company that trades publicly under the symbol "IBUI" on
the NASDAQ Bulletin Board.
<PAGE>
9. 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):
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Revenues:
Residential rehabilitation properties $ 14,451 $ 18,582
Mortgage banking 1,750 10,243
----- ------
$16,201 $ 28,825
======= =========
Less: (1)
Expenses allocable to residential rehabil-
itation properties (cost of sales, interest
expense and compensation and benefits) 15,180 17,902
Expenses allocable to mortgage banking
(all other) 7,006 9,221
----- -----
$22,186 $ 27,123
======= =========
Operating (Loss) Profit:
Residential rehabilitation properties (728) 680
Mortgage banking (5,257) 1,022
------ -----
$(5,985) $ 1,702
======= =========
Identifiable Assets (at June 30, 2000 and
December 31, 1999, respectively):
Residential rehabilitation properties $ 2,764 $ 16,294
Mortgage banking 20,148 61,332
------ ------
$22,912 $ 77,626
======= =========
(1) In managing its business, the Company does not allocate corporate expenses
other than interest and compensation and benefits to its various activities.
<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. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance. 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 among others, 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; (6) the
Company's management of cash flow and efforts to modify its prior growth
strategy; (7) the outcome of governmental investigations and the effects
thereof; (8) the Company's efforts to improve quality control; and other risks
and uncertainties described in the Company's Annual Report on Form 10-K and in
PMCC Financial Corp.'s other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes and events may
vary materially from those indicated.
Results of Operations
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
General
Due to recent developments regarding the Investigation referred to in "Part II -
Item 1. Legal Proceedings" (which recent developments were described in more
detail in the Company's Form 10-K for the year ended December 31, 1999), along
with a continuing significant reduction in the mortgage origination market
(particularly in the Northeast) caused by increasing interest rates and a
fall-off in mortgage refinancing, the Company continued to experience
significant losses for the three months ended June 30, 2000. The following
actions were taken:
o staffing at the Company's Roslyn retail office and administrative
offices, which was reduced in January 2000 from 86 employees to 45,
was further reduced in June 2000 to 17. In conjunction such reduction,
the Company has significantly reduced its office space in Roslyn by
reducing its current premises by more than 50% effective September
2000. PMCC is also pursuing a sublease for approximately half its
remaining space.
o staffing at the Company's New Jersey and remaining Florida wholesale
locations, which was reduced in January 2000 from 61 employees to 38
was further reduced in June 2000 to 31. The Florida locations have
also moved to more cost-efficient office locations during the second
quarter of 2000.
o the Company continued its initiative to sell the completed residential
rehabilitation properties on hand as quickly as practicable.
At the same time the above actions are being taken, PMCC's business
strategy is to stabilize and strengthen its remaining areas of business. The
Company has added new account executives in both New Jersey and Florida. It is
anticipated that more than 80% of mortgage loan applications taken by the
Company in 2000 will be as a result of its wholesale operations.
<PAGE>
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Quarters Ended June 30,
-----------------------
2000 1999
---- ----
Sales of residential rehabilitation properties $ 4,528,914 $10,037,429
Gains of sales of mortgage loans, net 563,448 4,078,815
Loss on sales of delinquent loans (862,000) -
Interest earned 428,266 1,036,909
------- ---------
Total revenues $ 4,658,628 $15,153,153
============ ===========
Revenues from the sale of residential rehabilitation properties decreased
$5.5 million, or 55%, to $4.5 million for the quarter ended June 30, 2000 from
$10.0 million for the quarter ended June 30, 1999. The number of residential
rehabilitation properties sold was 31 for the quarter ended June 30, 2000
compared to 64 for the quarter ended June 30, 1999. This decrease was a result
of the Company's discontinuance of the acquisition of residential rehabilitation
properties partly offset by the initiative to sell the completed properties on
hand as quickly as practicable.
Gains on sales of mortgage loans decreased $3.5 million, or 85%, to
$563,000 for the quarter ended June 30, 2000 from $4.1 million for the quarter
ended June 30, 1999. This decrease was due to a number of significant factors.
Mortgage loan originations were $49.3 million and $144.4 million for the
quarters ended June 30, 2000 and 1999, respectively. This 66% decrease was
primarily the result of a decline in retail originations arising from the
decrease in the number of retail loan officers, along with a significant
reduction in the mortgage origination market (particularly in the Northeast)
caused by increasing interest rates and a fall-off in mortgage refinancing. For
the quarter ended June 30, 2000, approximately 27% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
73% from its wholesale operations, compared to 55% retail and 45% wholesale for
the three months ended June 30, 1999. Wholesale loans result in lower revenues
due to broker fees paid of approximately 1% being deducted directly from the
gain on sale, whereas retail loan commissions are shown on the statement of
operations as expenses. Costs per loan for wholesale loans are generally lower
overall than retail. Replacing the retail loan volume with wholesale loans
reduced gains by approximately $200,000 for the three-months ended June 30, 2000
compared to the three-months ended June 30, 1999. In 1999, the Company was able
to optimize the margins received on the sales of loans by hedging positions in
future sales of Mortgage Backed Securities. This activity was halted due to the
Investigation and subsequent suspension of trading of the Company's stock. For
the quarter ended June 30, 2000, this resulted in approximately a 0.75% loss in
revenue per loan or $370,000 in total compared to the three-months ended June
30, 1999. Additionally, 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 $200,000 for the
three-months ended June 30, 2000 compared to the three-months ended June 30,
1999.
The following table summarizes the Company's mortgage originations (in
millions):
Quarters Ended June 30,
-----------------------
2000 1999
---- ----
Conventional $ 45,729 $ 91,915
FHA/VA 3,607 48,581
Subprime -- 3,943
-------- -----
Total $ 49,336 $144,439
======== ========
Although there can be no assurance thereof, the Company expects mortgage
originations to increase and therefore believes its gains on sales of mortgage
loans will increase.
The loss on sale of delinquent loans for the three months ended June 30,
2000 was the result of the Company selling at discounted prices delinquent and
non-performing loans that it would normally maintain in its portfolio to
eventually work out and recover its investment through foreclosure procedures or
refinancing. In prior years, PMCC had warehouse lines where they could hold
these loans throughout the foreclosure process. Bank United terminated this
portion of their line immediately after the Investigation began in December
1999. In order to fulfill agreements with its lenders, the Company needed to
sell the loans to pay off the warehouse lines as well as to meet the Company's
additional cash requirements in the first six months of 2000. These were imposed
by increased capital requirements and Amendment Fees for warehouse lines,
reduced warehouse commitments and additional professional fees (legal,
consulting and audit) that were incurred as a result of the Investigation.
Interest earned decreased $609,000, or 59%, to $428,000 for the quarter
ended June 30, 2000 from $1.0 million for the quarter ended June 30, 1999. This
decrease was primarily due to decreased mortgage originations for the quarter
ended June 30, 2000 as compared to the quarter ended June 30, 1999 and sub prime
mortgage originations which generally are at higher rates and are held for sale
longer than conventional mortgage originations.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Quarters Ended June 30,
-----------------------
2000 1999
---- ----
Cost of sales - residential rehabilitation properties $ 4,715,422 $ 9,151,254
Compensation and benefits 1,458,754 2,874,131
Interest expense 376,225 1,018,959
Expenses resulting from Investigation 345,644 --
Other general and administrative 1,050,707 1,207,836
--------- ---------
Total expenses $ 7,946,752 $14,252,180
=========== ===========
Cost of sales - residential rehabilitation properties decreased $4.5
million, or 49%, to $4.7 million for the quarter ended June 30, 2000 from $9.2
million for the quarter ended June 30, 1999. This decrease was the result of the
decrease in the number of properties sold in the quarter ended June 30, 2000
compared to the quarter ended June 30, 1999.
Compensation and benefits decreased $1.4 million, or 48%, to $1.4 million
for the quarter ended June 30, 2000 from $2.9 million for the quarter ended June
30,1999. This decrease was primarily due to decreased sales salaries and
commission, which are based substantially on mortgage loan originations, and the
reductions in staff at the Company's Roslyn and New Jersey locations, partly
offset by the personnel added in Florida as part of the Prime Mortgage Corp.
acquisition in July 1999. Total personnel decreased to 47 employees at June 30,
2000 from 172 at June 30, 1999.
Interest expense decreased $643,000, or 63%, to $376,000 for the quarter
ended June 30, 2000 from $1.0 million for the quarter ended June 30, 1999. This
decrease was primarily attributable to the decrease in mortgage originations and
the decrease in the amount of sub-prime mortgage originations that generally are
held on the warehouse lines longer than conventional mortgage originations along
with the decrease in residential rehabilitation properties funded through the
Company's warehouse facility.
As a result of the Investigation, the Company incurred direct expenses of
$346,000 for the three-month period ended June 30, 2000. These expenses
primarily include legal and professional fees incurred in connection with the
internal investigation of the Company, criminal defense attorneys and
negotiations of warehouse lines of credit amendments and bonuses to Company
employees.
Other general and administrative expense decreased $157,000, or 13%, to
$1.1 million for the quarter ended June 30, 2000 from $1.2 million for the
quarter ended June 30, 1999. This decrease was primarily due to decreased
expenses in connection with the contraction in the operations of the Company,
partly offset by increases incurred in connection with the expansion in Florida
from the Prime acquisition, including rent and facilities expense, telephone and
marketing.
Although there can be no assurance thereof, the Company believes that, as a
result of certain cost cutting initiatives and contraction of business expansion
in the first and second quarters of 2000, expenses will decrease.
The net loss of $3.3 million for the quarter ended June 30, 2000 was a
decrease of $3.8 million or 718%, from the net income of $532,000 for the
quarter ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
General
Due to developments regarding the Investigation referred to in "Part II - Item
1. Legal Proceedings" (which recent developments were described in more detail
in the Company's Form 10-K for the year ended December 31, 1999), along with a
significant reduction in the mortgage origination market (particularly in the
Northeast) caused by increasing interest rates and a fall-off in mortgage
refinancing, many of the Company's growth initiatives were suspended or closed
down completely in the six months ended June 30, 2000. The following actions
were taken:
o staffing at the Company's Roslyn retail office and administrative
offices was reduced from 86 employees to 45 in January 2000 and
further reduced to 17 in June 2000. In conjunction such reduction, the
Company has significantly reduced its office space in Roslyn by
reducing its current premises by more than 50% effective September
2000. PMCC is also pursuing a sublease for approximately half its
remaining space.
o all retail branches opened during 1998 and 1999 were closed, along
with one wholesale office acquired from Prime, resulting in a staff
reduction of 36 employees. This included retail branches in potential
high growth areas such as Las Vegas, Phoenix and Deerfield Beach which
were in start-up situations and were incurring high expenses in
relation to their current origination volume.
o staffing at the Company's New Jersey and remaining Florida wholesale
locations was reduced from 61 employees to 38 in January 2000 and to
31 in June 2000. The Florida locations have moved to more
cost-efficient office locations.
o the Company's web-site was temporary closed down as was the Internet
call center in Houston. As a start-up operation, this area was
incurring high expenses in relation to the current origination volume.
o the Company temporarily halted the acquisition of residential
rehabilitation properties and began an initiative to sell the
completed properties on hand as quickly as practicable.
At the same time the above actions are being taken, PMCC's business
strategy is to stabilize and strengthen its remaining areas of business. The
Company has added new account executives in both New Jersey and Florida. It is
anticipated that more than 80% of mortgage loan applications taken by the
Company in 2000 will be as a result of its wholesale operations.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Sales of residential rehabilitation properties $ 14,451,115 $ 18,582,407
Gains of sales of mortgage loans, net 1,650,433 7,886,718
Loss on sale of delinquent loans (900,000) --
Interest earned 999,152 2,356,344
------------ ------------
Total revenues $ 16,200,700 $ 28,825,469
============ ============
Revenues from the sale of residential rehabilitation properties decreased
$4.1 million, or 22%, to $14.5 million for the six months ended June 30, 2000
from $18.6 million for the six months ended June 30, 1999. The number of
residential rehabilitation properties sold was 103 for the six months ended June
30, 2000 compared to 116 for the six months ended June 30, 1999. This decrease
was a result of the Company's discontinuance of the acquisition of residential
rehabilitation properties partly offset by the initiative to sell the completed
properties on hand as quickly as practicable. Additionally, on certain
properties sold, a discount was given from the original contract pricing in
order to expedite the sale due to cash requirements.
Gains on sales of mortgage loans decreased $6.2 million, or 78%, to $1.7
million for the six months ended June 30, 2000 from $7.9 million for the six
months ended June 30, 1999. This decrease was due to a number of significant
factors. Mortgage loan originations were $108.8 million and $279.3 million for
the six months ended June 30, 2000 and 1999, respectively. This 61% decrease was
primarily the result of a decline in retail originations arising from the
decrease in the number of retail loan officers, along with a significant
reduction in the mortgage origination market (particularly in the Northeast)
caused by increasing interest rates and a fall-off in mortgage refinancing. For
the six months ended June 30, 2000, approximately 35% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
65% from its wholesale operations, compared to 56% retail and 44% wholesale for
the six months ended June 30, 1999. Wholesale loans result in lower revenues due
to broker fees paid of approximately 1% being deducted directly from the gain on
sale, whereas retail loan commissions are shown on the statement of operations
as expenses. Costs per loan for wholesale loans are generally lower overall than
retail. Replacing the retail loan volume with wholesale loans reduced gains by
approximately $375,000 for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999. In 1999, the Company was able to optimize the
margins received on the sales of loans by hedging positions in future sales of
Mortgage Backed Securities. This activity was halted due to the Investigation
and subsequent suspension of trading of the Company's stock. For the six months
ended June 30, 2000, this resulted in approximately a 0.75% loss in revenue per
loan or $815,000 in total compared to the six months ended June 30, 1999.
Additionally, 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 $1.0 million for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999.
The following table summarizes the Company's mortgage originations (in
millions):
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Conventional $ 93,847 $181,358
FHA/VA 14,980 88,387
Subprime -- 9,537
-------- --------
Total $108,827 $279,282
======== ========
Although there can be no assurance thereof, the Company expects mortgage
originations to increase and therefore believes its gains on sales of mortgage
loans will increase.
The loss on sale of delinquent loans for the six months ended June 30, 2000
was the result of the Company selling at discounted prices delinquent and
non-performing loans that it would normally maintain in its portfolio to
eventually work out and recover its investment through foreclosure procedures or
refinancing. In prior years, PMCC had warehouse lines where they could hold
these loans throughout the foreclosure process. Bank United terminated this
portion of their line immediately after the Investigation began in December
1999. In order to fulfill agreements with its lenders, the Company needed to
sell the loans to pay off the warehouse lines as well as to meet the Company's
additional cash requirements in the first six months of 2000. These were imposed
by increased capital requirements and Amendment Fees for warehouse lines,
reduced warehouse commitments and additional professional fees (legal,
consulting and audit) that were incurred as a result of the Investigation.
Interest earned decreased $1.3 million, or 57%, to $1.0 million for the six
months ended June 30, 2000 from $2.3 million for the six months ended June 30,
1999. This decrease was primarily due to decreased mortgage originations for the
six months ended June 30, 2000 as compared to the six months ended June 30, 1999
and sub prime mortgage originations which generally are at higher rates and are
held for sale longer than conventional mortgage originations.
<PAGE>
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Cost of sales - residential rehabilitation properties $14,188,353 $16,955,448
Compensation and benefits 3,350,558 5,604,762
Interest expense 1,072,179 2,198,915
Expenses resulting from Investigation 1,490,900 --
Other general and administrative 2,083,665 2,363,480
--------- ---------
Total expenses $22,185,655 $27,122,605
=========== ===========
Cost of sales - residential rehabilitation properties decreased $2.8
million, or 16%, to $14.2 million for the six months ended June 30, 2000 from
$17.0 million for the six months ended June 30, 1999. This decrease was the
result of the decrease in the number of properties sold in the six months ended
June 30, 2000 compared to the six months ended June 30, 1999.
Compensation and benefits decreased $2.2 million, or 39%, to $3.4 million
for the six months ended June 30, 2000 from $5.6 million for the six months
ended June 30,1999. This decrease was primarily due to decreased sales salaries
and commission, which are based substantially on mortgage loan originations, and
the reductions in staff at the Company's Roslyn and New Jersey locations, partly
offset by the personnel added in Florida as part of the Prime Mortgage Corp.
acquisition in July 1999. Total personnel decreased to 47 employees at June 30,
2000 from 172 at June 30, 1999.
Interest expense decreased $1.1 million, or 50%, to $1.1 million for the
six months ended June 30, 2000 from $2.2 million for the six months ended June
30, 1999. This decrease was primarily attributable to the decrease in mortgage
originations and the decrease in the amount of sub-prime mortgage originations
that generally are held on the warehouse lines longer than conventional mortgage
originations along with the decrease in residential rehabilitation properties
funded through the Company's warehouse facility.
As a result of the Investigation, the Company incurred direct expenses of
$1.5 million in the six month period ended June 30, 2000. These expenses include
legal and professional fees incurred in connection with the internal
investigation of the Company, criminal defense attorneys and negotiations of
warehouse lines of credit amendments. Also included in these expenses are bank
fees relating to granting amendments to the Bank United line of credit and
bonuses paid to the Company's officers and employees.
Other general and administrative expense decreased $279,000, or 12%, to
$2.1 million for the six months ended June 30, 2000 from $2.4 million for the
six months ended June 30, 1999. This decrease was primarily due to decreased
expenses in connection with the contraction in the operations of the Company,
partly offset by increases incurred in connection with the expansion in Florida
from the Prime acquisition, including rent and facilities expense, telephone and
marketing.
Although there can be no assurance thereof, the Company believes that, as a
result of certain cost cutting initiatives and contraction of business expansion
in the first six months of 2000, expenses will decrease.
The net loss of $4.8 million for the six months ended June 30, 2000 was a
decrease of $5.8 million or 580%, from the net income of $1.0 million for the
six months ended June 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 the warehouse
lines of credit at June 30, 2000 was $15.8 million. The mortgage loans and
residential rehabilitation properties funded with the proceeds from such
borrowings secure the warehouse lines of credit
On August 7, 1998, the Company entered into a Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC"). The Chase Line provided a warehouse line of
credit of $120 million ($90 million committed at August 11, 1998) for its
mortgage originations and residential rehabilitation purchases. The Chase 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. The
Company is required to comply with certain financial covenants and the
borrowings for residential rehabilitation properties are guaranteed by Ronald
Friedman and Robert Friedman. The Chase Line originally was set to expire in
August 1999 but was extended through November 8, 1999. Chase and PNC both had
decided to curtail their involvement in mortgage warehouse lending and had
decided not to renew the facility for that reason. The Chase Line was further
extended to December 24, 1999 on a declining basis in order to complete the
funding of all loans and properties on the line on November 8, 1999. No new
loans or properties were added to this line subsequent to November 8, 1999.
Chase and PNC had agreed to continue to extend the line on a specified declining
basis through a series of short-term extensions through July 31, 2000. This line
in the process of being extended to August 15, 2000. The balance remaining on
this line of $1.3 million at July 31, 2000 relates entirely to the residential
rehab portfolio. The Company anticipates paying down the entire facility either
through sales of the underlying properties or by obtaining an alternate
financing source no later than August 31, 2000. Interest payable on the Chase
Line is variable based on LIBOR plus 1.25% to 2.25% based upon the underlying
collateral. Minimal fees were paid for the extensions and there was no change in
the method of calculating interest.
The Company also maintained a warehouse line of credit with GMAC/RFC (the
"RFC Line") of $20 million that was used primarily for sub-prime loans and
residential rehabilitation properties. The RFC Line was set to expire on January
31, 2000. RFC had decided not to renew the warehouse line due to low usage as a
result of the Company's exiting the sub-prime business and RFC's curtailment of
their involvement in residential rehabilitation lending. RFC had agreed to
continue to extend the line on a declining basis through a series of short term
extensions, the most recent of which expired on June 15, 2000, This line of
credit was paid in full in June 2000.
To replace the expiring Chase Line, the Company entered into a one-year
Mortgage Warehousing Loan and Security Agreement (the "Bank United Line") with
Bank United, a federally chartered savings bank, as lending bank and agent. The
Bank United Line provided a warehouse line of credit of $120 million ($40
million of which was committed by Bank United and the remainder of which was not
committed) for its mortgage originations and residential rehabilitation
purchases. The Bank United 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. Interest payable on the Bank United Line
was variable based on LIBOR plus 1.50% to 2.50% based upon the underlying
collateral.
Due to the events relating to the Investigation, on December 22, 1999, Bank
United declared a default of the Bank United Line agreement and suspended
funding under the agreement. Bank United continued to fund new mortgage loans
only on a limited day to day basis and only with the personal guarantee of
Ronald Friedman and additional collateral in the form a $500,000 cash deposit by
the Company at Bank United. On January 18, 2000, Bank United agreed to a limited
extension of the warehouse agreement through January 28, 2000 and to waive the
existing default relating to the Investigation. In return for this, Bank United
required additional collateral pledged to the bank in the form of the $500,000
cash deposit previously noted and $1.5 million in marketable titles to
residential rehabilitation properties owned by PMCC, an additional 3% cash
reduction in the funding amount of all loans funded on the Bank United Line, the
continued personal guarantee of Ronald Friedman and an Amendment Fee of
$250,000. The Commitment amount of the line was reduced from $40 million to $33
million and the interest rate was increased to LIBOR plus 2.00% to 3.50% based
upon the underlying collateral. On February 1, 2000, for an additional Amendment
Fee of $100,000, Bank United agreed to an extension on similar terms through
February 28, 2000. Beginning March 1, 2000, Bank United had agreed to continue
to extend the line on a declining basis through a series of short term
extensions, the most recent of which expired on June 15, 2000, This line of
credit was paid in full in June 2000.
To replace a portion of the Bank United Line, on February 28, 2000, the
Company entered into a Master Repurchase Agreement that provides the Company
with a warehouse facility (the"IMPAC Line") through IMPAC Warehouse Lending
Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of
$20 million for the Company's mortgage originations only. The IMPAC Line is
secured by the mortgage loans funded with the proceeds of such borrowings.
Interest payable on the IMPAC Line is variable based on the Prime Rate as posted
by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration
date but is terminable by either party upon written notice.
The Company currently expects that the existing IMPAC Line will be
sufficient to fund all anticipated loan originations for the current year
provided all new loans are sold to investors on a loan by loan basis. In order
to maximize potential profits through hedging strategies, additional lines would
be required and will be applied for.
The Company had additional cash requirements in the first six months of
2000 imposed by the increased capital requirements and Amendment Fees for it
warehouse lines, the reduced warehouse commitments and additional professional
fees (legal, consulting and audit) that were incurred as a result of the
Investigation. In order to raise cash expediently, the Company sold residential
rehabilitation properties in its portfolio at prices that reduced the
contractual fees the Company normally received from the sales of those
properties and in certain instances at a price less than the cost to PMCC. The
Company also sold at discounted prices delinquent and non-performing loans that
it would normally maintain in its portfolio to eventually work out and recover
its investment through foreclosure procedures or refinancing. Additionally, the
Company closed new "start-up" retail branches opened in 1998 and 1999, closed
the newly opened internet call center in Houston and reduced staffing at all
remaining locations. The Company believes that a greater emphasis on wholesale
lending presents the Company with the ability to continue to offer consumers a
broad range of products by the most cost-effective means. The Company's existing
capital resources, including the funds from its $20 million committed warehouse
facility with IMPAC and cash flow from its remaining operations, are expected to
be sufficient to fund its current mortgage banking operation during 2000.
Net cash provided by operations for the six months ended June 30, 2000 was
$34.2 million. The Company generated cash from the $28.1 million decrease in
mortgage loans held for sale and receivable from sales of loans and by a $12.9
million net decrease in residential rehabilitation properties. The Company used
cash to reduce borrowings under its warehouse lines of credit by $34.8 million.
Impact of New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999, which has been deferred to June 30, 2000 by the publishing of
SFAS No. 137. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement of
financial condition and measures those instruments at fair value. The accounting
for changes in the fair value of a derivative (that is, gain and losses) depends
on the intended use of the derivative and the resulting designation. SFAS No.
133 does not require restatement of prior periods. Management is currently
assessing the impact of SFAS No. 133 on its financial condition and results of
operations.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
None.
<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.
The U.S. Attorney's Office for the Eastern District of New York ("U.S.
Attorney") is conducting an investigation (the "Investigation") into the
allegations asserted in a criminal complaint against Ronald Friedman, the former
Chairman of the Board, President and Chief Executive Officer of the Company, and
a loan officer formerly employed by the Company. On December 21, 1999, agents of
the Office of Inspector General for HUD executed search and arrest warrants at
the Roslyn offices of the Company. The warrants were issued on the basis of a
federal criminal complaint ("Complaint"), which charged that Ronald Friedman and
the loan officer knowingly and intentionally made, uttered or published false
statements in connection with loans to be insured by HUD.
In response to the allegations against the loan officer and Friedman, the
Company engaged the legal services of Dorsey & Whitney LLP to conduct an
internal investigation into the alleged misconduct and to prepare a report
discussing the findings of the internal investigation. As part of this internal
investigation, the Company worked closely and in cooperation with HUD and the
U.S. Attorney. In addition, key employees, including loan officers, loan
processors, underwriters and managers, were interviewed. An audit also was
conducted of over one-third of all 1999 FHA loans in order to assess whether the
files comported with the HUD guidelines for FHA loans.
A preliminary report detailing Dorsey & Whitney's investigation and
findings was presented to the Company's Board of Directors on April 12, 2000. A
written report was issued on April 14, 2000. The report concludes that while
there appears to be support for the allegations leveled at the loan officer,
there is no evidence that the misconduct alleged in the complaint was systemic
at the Company. Rather, the findings support the conclusion that the alleged
misconduct was an isolated occurrence, not an institutional practice. The
available evidence did not permit Dorsey & Whitney to reach a definitive
conclusion concerning the charges pending against Ronald Friedman. The
investigation, comprised of interviews with PMCC employees and an extensive
review of mortgage loan files, revealed no independent evidence tending to
support the allegations against Friedman contained in the criminal complaint.
While the Company believes that it has not committed any wrongdoing, it
continues to cooperate fully with the U.S. Attorney's Office and HUD. However,
it cannot predict the duration of the Investigation or its potential outcome.
Although the Company does not anticipate being charged in connection with this
investigation, in the event that the Company was charged, it intends to
vigorously defend its position. While the Company does not anticipate its
occurrence, in the event that it was to lose its ability to originate and sell
FHA loans as result of the Investigation, the Company does not believe that the
financial effect on the Company would be material. The Company originates
approximately 7% of its current loan volume through FHA products
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMCC FINANCIAL CORP.
(Registrant)
By /s/ Andrew Soskin
------------------------------------
Andrew Soskin
Interim President
By /s/ Keith Haffner
------------------------------------
Keith Haffner
Interim Chief Executive Officer
By /s/ Stephen J. Mayer
------------------------------------
Stephen J. Mayer
Chief Financial Officer
(Principal Accounting Officer)
Dated: August 11, 2000
