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, 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)
1767 Morris Avenue
Union, NJ 07083
(Address of Principal Executive Offices and Zip Code)
(908) 687-2000
(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 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 September 30, 2000 and 1999 3
Nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Financial Condition (Unaudited) 5
September 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows (Unaudited) 6
Nine months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial Condition 13-23
and Results of Operations
Part II - Other Information 24-25
Exhibit Index 25
Signatures 26
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
PMCC FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
------------------
September 30,
-------------
2000 1999
---- ----
Revenues:
Sales of residential rehabilitation properties $ 1,692,348 $ 10,743,477
Gains on sale of mortgage loans, net 761,840 3,730,304
Interest earned 232,206 1,301,292
------------ ------------
2,686,394 15,775,073
--------- ----------
Expenses:
Costs of sales, residential rehabilitation properties 1,650,645 9,610,539
Compensation and benefits 963,310 3,419,097
Interest expense 464,976 1,291,761
Expenses resulting from Investigation (Note 7) 86,500 --
Expenses relating to closing Roslyn office 551,170 --
Other general and administrative 819,842 1,439,622
------------ ------------
4,536,443 15,761,019
--------- ----------
(Loss) income before income tax expense (1,850,049) 14,054
Income tax expense - 6,000
------------ ------------
Net (loss) income $ (1,850,049) $ 8,054
============ ============
Net (loss) income per share of common stock-basic $ (0.50) $ 0.002
============ ============
Net (loss) income per share of common stock-diluted $ (0.50) $ 0.002
============ ============
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 3,795,046
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months ended
-----------------
September 30,
-------------
2000 1999
---- ----
Revenues:
Sales of residential rehabilitation properties $ 16,143,462 $ 29,325,884
Gains on sale of mortgage loans, net 2,412,274 11,617,022
Loss on sales of delinquent loans (900,000) --
Interest earned 1,231,358 3,657,636
------------ ------------
18,887,094 44,600,542
---------- ----------
Expenses:
Costs of sales, residential rehabilitation properties 15,838,998 26,565,987
Compensation and benefits 4,313,868 9,023,859
Interest expense 1,537,155 3,490,676
Expenses resulting from Investigation (Note 7) 1,577,400 --
Expenses relating to closing Roslyn office 551,170 --
Other general and administrative 2,903,507 3,803,102
------------ ----------
26,722,098 42,883,624
---------- ----------
(Loss) income before income tax (benefit) expense (7,835,004) 1,716,918
Income tax (benefit) expense (1,161,435) 704,000
------------ ------------
Net (loss) income $ (6,673,569) $ 1,012,918
============ ============
Net (loss) income per share of common stock-basic $ (1.80) $ 0.27
============ ============
Net (loss) income per share of common stock-diluted $ (1.80) $ 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 3,764,450
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
<S> <C> <C>
Unaudited Audited
September 30, December 31,
2000 1999
---- ----
Assets
Cash and cash equivalents $ 51,632 $ 214,957
Restricted cash -- 500,000
Mortgage loans held for sale, net 16,435,425 36,666,397
Mortgage loans held for investment, net 796,209 3,112,179
Receivable from sales of loans -- 4,300,279
Accrued interest and other receivables, net 2,612,060 1,521,756
Residential rehabilitation properties, net 1,224,246 15,189,753
Furniture, fixtures & equipment, net 746,050 1,169,327
Prepaid expenses and other assets 464,451 870,875
------------ ------------
Total assets $ 22,330,073 $ 63,545,523
============ ============
Liabilities and shareholders' equity
Liabilities:
Notes payable-principally warehouse lines of credit $ 16,374,249 $ 50,584,370
Deferred income taxes -- 333,000
Accrued expenses and other liabilities 1,429,173 1,531,374
------------ ------------
Total liabilities 17,803,422 52,448,744
------------ ------------
Shareholders' equity
Common stock 37,500 37,500
Additional paid-in capital 11,020,724 10,917,283
Retained (deficit) earnings (6,277,102) 396,467
Treasury stock (254,471) (254,471)
------------ ------------
Total shareholders' equity 4,526,651 11,096,779
------------ ------------
Total liabilities and shareholders' equity $ 22,330,073 $ 63,545,523
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months ended
-----------------
September 30,
-------------
2000 1999
---- ----
Cash flows from operating activities:
Net (loss) income $ (6,673,569) $ 1,012,918
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 (304,464) (2,759,897)
Proceeds from sales of properties 16,143,462 29,325,884
Costs of properties acquired (1,873,491) (24,795,404)
Depreciation and amortization 275,822 196,894
Increase in interest and other receivables (1,090,304) (1,341,883)
Decrease in mortgage loans held for sale and
investment, net 22,546,942 11,361,570
Decrease in receivable from sales of loans 4,300,279 13,110,096
Decrease (increase) in prepaid expenses and other assets 406,424 (264,140)
Decrease in deferred taxes payable (333,000) (1,187,998)
(Decrease) increase in accrued expenses and other (102,201) 363,353
liabilities -------- -------
Net cash provided by operating activities 33,295,900 25,021,393
---------- ----------
Cash flows from investing activities:
Acquisition of assets of Prime Mortgage Corp. -- (250,000)
Disposition of furniture and equipment 264,146 --
Purchase of furniture and equipment (63,250) (225,938)
------- --------
Net cash provided by (used in) investing activities 200,896 (475,938)
------- --------
Cash flows from financing activities:
Net decrease in notes payable-warehouse lines of credit (34,210,121) (27,213,394)
Net decrease in restricted cash 500,000 --
Issuance of warrants 50,000 --
Distributions to S corporation shareholders -- (277,700)
---------- --------
Net cash used in financing activities (33,660,121) (27,491,094)
----------- -----------
Net increase (decrease) in cash and cash equivalents (163,325) (2,945,639)
Cash and cash equivalents at beginning of period 214,957 3,596,002
------------ ------------
Cash and cash equivalents at end of period $ 51,632 $ 650,363
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,179,570 $ 3,487,515
============ ============
Income taxes $ 11,190 $ 504,647
============ ============
Loans transferred from mortgage loans held for sale to held for
Investment, net $ 470,100 $ 2,822,762
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 70,246 shares for the three months
ended September 30, 1999 and 39,650 shares for the nine months ended
September 30, 1999. There was no dilution for either the three months or
nine months ended September 30, 2000.
5. Notes Payable
At September 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
December 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 November 9, 2000 is approximately $489,000.
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 former President and
CEO currently a consultant to the Company. 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. Under the same note, the Company borrowed
an additional $50,000 in July 2000. The Company repaid $80,000 in August
2000 and $175,000 in October 2000 when a portion of the underlying
collateral was sold by the Company. The balance due on the note at November
8, 2000 is $70,000.
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 September 30, 2000, the subsidiary owned no
remaining 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 by Dorsey & Whitney 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 less than 5% of its current loan volume
through FHA products.
As a result of this investigation, the Company incurred $1.577 million
and $87,000 of direct expenses for the nine months and three months ended
September 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. Change of Control
Effective July 28, 2000, PMCC Financial Corp. announced that Internet
Business's International, Inc. ("IBUI") is purchasing the 2,460,000 shares
of the Registrant held by Ronald Friedman, Robert Friedman and the Ronald
Friedman 1997 Guarantor Retained Annuity Trust (collectively, the
"Sellers") in a private transaction (the "Transaction"). This purchase
represents 66.36% of the 3,707,000 shares of common stock of the Registrant
outstanding. IBUI is a holding company with a variety of Internet
subsidiaries that trades publicly under the symbol IBUI on the NASDAQ
Bulletin Board. The aggregate purchase price of $3,198,000 is to be paid in
cash to the Sellers by IBUI as follows over a period of nine months from
the date of closing.
In the event that three months after closing, the Registrant's common
stock is not trading on either the American Stock Exchange ("AMEX") or
NASDAQ, the purchase price shall be reduced by the amount of the Final
Payments, which payments will no longer be due and payable. In the event,
however, that AMEX or NASDAQ initiates trading in months three through five
subsequent to closing, and IBUI merges the Registrant with IBUI or any of
its affiliates, the purchase price will not be reduced.
At the closing, all shares purchased by IBUI from the Sellers were
deposited in escrow with the Sellers' attorney. These shares are released
to IBUI upon receipt of the scheduled installment payments. If IBUI is
relieved from making the Final Payment, then the Eighth and Ninth
installment shares will be released from escrow on the 210th day after
closing.
Simultaneous with the Transaction, the Company's Board of Directors
passed a resolution to amend the Company's By-laws to provide for an
increase in the number of directors from four to seven. Keith Haffner, the
Company's Executive Vice President and Interim Chief Executive Officer,
resigned from the Board. Albert Reda, IBUI's Chief Executive Officer, Louis
Cherry, IBUI's President and David Flyer, a consultant to IBUI, were
elected to the Company's Board. The seventh Board member, Carl Carstensen,
President IBM Solutions, European Divisions, will be elected to the Board
effective at the earliest time such election is permitted pursuant to Rule
14f-1 of the Rules and Regulations under the Securities Exchange Act of
1934.
9. American Stock Exchange
On September 22, 2000, PMCC Financial Corp. was advised by the
American Stock Exchange that it is the intention of the Exchange to proceed
with the filing of an application with the Securities and Exchange
Commission to strike the Company's common stock from listing and
registration on the Exchange. Under Section 1003 (f)(iii) of the Exchange's
Company Guide, the Exchange may at any time remove a security from listing
if the company or its management shall engage in operations which, in the
opinion of the Exchange, are contrary to the public interest. Citing the
previously announced criminal complaint (the "Complaint") and investigation
by the U.S. Attorney (the "Investigation") which have not been resolved,
the Exchange believes that the nature and extent of the allegations of the
Complaint, the related Investigation and Ronald Friedman's continued
association with the Company as a consultant hired by the Board of
Directors raise significant public interest concerns. The Exchange further
expressed concern over the proposed transaction with IBUI and the lack of
information concerning the eligibility for listing of the combined entity.
The Company has appealed the decision by the AMEX and has met with the
Exchange's Committee on Securities on November 6, 2000. The results of the
appeal are not known at this time.
10. Subsequent Events
In light of the decision pending appeal by the AMEX to de-list the
trading of the Company's common stock, certain payments due under the
agreement by IBUI to purchase shares of the Company's stock from Ronald
Friedman, Robert Friedman and the Ronald Friedman 1997 Guarantor Retained
Annuity Trust were not made. The Company has been informed by the Sellers
that an event of default has been declared against IBUI under this purchase
agreement. At this time, a definitive letter agreement has been reached by
all parties involved in the Transaction that will cure the default and
change certain terms of the purchase including the price and manner of
payment. A formal agreement is expected to be signed within a two-week
period.
Additionally, merger talks have resumed between the Company and IBUI
whereby IBUI will propose to purchase the remaining outstanding shares of
PMCC in exchange for IBUI stock. No agreements have been reached, however,
a letter of intent is expected to be agreed upon within before the end of
2000. Such a merger would increase the Company's capital base, improve the
combined balance sheet and allow the Company to seek additional warehouse
lines of credit, raise additional capital or issue debt securities. The
Transaction and resultant merger, or a similar agreement, are necessary in
order to ensure the ongoing viability of the Company.
11. 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)
Nine months ended
-----------------
September 30,
-------------
2000 1999
------ ----
Revenues:
Residential rehabilitation properties $16,143 $ 29,326
Mortgage banking 2,744 15,275
--------- ------
$18,887 $44,601
======= =======
Less: (1)
Expenses allocable to residential rehabil-
itation properties (cost of sales, interest
expense and compensation and benefits) 17,037 28,417
Expenses allocable to mortgage banking
(all other) 9,685 14,467
------- --------
$26,722 $42,884
======= =======
Operating (Loss) Profit:
Residential rehabilitation properties (894) 909
Mortgage banking (6,941) 808
------- --------
$(7,835) $ 1,717
======= ========
Identifiable Assets (at September 30, 2000 and
December 31, 1999, respectively):
Residential rehabilitation properties $ 1,794 $ 15,190
Mortgage banking 20,536 48,356
-------- ---------
$22,330 $ 63,546
======= =========
(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 September 30, 2000 Compared to Quarter Ended September 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 September 30, 2000. The following
actions were taken:
o In a continuing effort to reduce the Company's overhead and expenses
and achieve profitability, PMCC Mortgage Corp. at its Board of
Directors meeting on September 18, 2000 determined that on October 1,
2000, the Company would permanently close its office in Roslyn
Heights, NY. PMCC Mortgage Corp. and PMCC Financial Corp. has
relocated their corporate offices to the location of the existing
branch office and former corporate office at 1767 Morris Avenue,
Union, NJ 07083. In conjunction with this closing, the Company has
negotiated with its landlord at 3 Expressway Plaza to terminate the
remaining 4.5 years of its lease at that location. This settlement
includes the issuance of 200,000 warrants to purchase PMCC Common
Stock at a price to be determined at such time the Company's stock
actively begins trading. Certain post-closing and administrative
functions are being absorbed by the existing personnel in the
Company's New Jersey and Florida locations. The cost for terminating
employees and the lease in Roslyn is approximately $550,000 which is
included in the third quarter financials. After all reductions noted
herein, it is anticipated that the Company will experience annualized
cost savings of approximately $1.5 million. The Company's Roslyn
retail office and administrative offices had previously been reduced
in January 2000 from 86 employees to 45 and again in June 2000 to 17.
To maintain a presence in New York State, the Company is occupying
office space of approximately 1,000 square feet in Rockville Centre,
Long Island.
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.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Quarters Ended September 30,
----------------------------
2000 1999
---- ----
Sales of residential rehabilitation properties $ 1,692,348 $10,743,477
Gains of sales of mortgage loans, net 761,840 3,730,304
Interest earned 232,206 1,301,292
------------ ------------
Total revenues $ 2,686,394 $15,775,073
============ ===========
Revenues from the sale of residential rehabilitation properties decreased
$9.0 million, or 84%, to $1.7 million for the quarter ended September 30, 2000
from $10.7 million for the quarter ended September 30, 1999. The number of
residential rehabilitation properties sold was 13 for the quarter ended
September 30, 2000 compared to 62 for the quarter ended September 30, 1999. This
decrease was a result of the Company's discontinuance of the acquisition of
residential rehabilitation.
Gains on sales of mortgage loans decreased $2.9 million, or 78%, to
$762,000 for the quarter ended September 30, 2000 from $3.7 million for the
quarter ended September 30, 1999. This decrease was due to a number of
significant factors. Mortgage loan originations were $49.4 million and $166.7
million for the quarters ended September 30, 2000 and 1999, respectively. This
70% 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 September 30, 2000, approximately 20% of the
Company's mortgage originations were derived from its retail mortgage operations
and approximately 80% from its wholesale operations, compared to 53% retail and
47% wholesale for the three months ended September 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 September 30, 2000 compared to the three-months ended
September 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
September 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 September 30, 1999.
Additionally, in past years, sub-prime loans were generally sold at a higher per
loan margin than conventional loans. Discontinuing sub-prime loan originations
reduced gains by approximately $200,000 for the three-months ended September 30,
2000 compared to the three-months ended September 30, 1999.
The following table summarizes the Company's mortgage originations (in
millions):
Quarters Ended September 30,
----------------------------
2000 1999
---- ----
Conventional $49,030 $119,129
FHA/VA 406 45,598
Subprime - 2,148
------- --------
Total $49,436 $166,875
======== ========
Although there can be no assurance thereof, the Company expects mortgage
originations to increase and therefore believes its gains on sales of mortgage
loans will increase.
Interest earned decreased $1.1 million, or 85%, to $232,000 for the quarter
ended September 30, 2000 from $1.3 million for the quarter ended September 30,
1999. This decrease was primarily due to decreased mortgage originations for the
quarter ended September 30, 2000 as compared to the quarter ended September 30,
1999 and a decrease in the amount of time a loan is held before being sold to
the final investor. This more rapid turnover allows the Company to utilize a
lower warehouse line.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Quarters Ended September 30,
----------------------------
2000 1999
---- ----
Cost of sales-residential rehabilitation properties $ 1,650,645 $ 9,610,539
Compensation and benefits 963,310 3,419,097
Interest expense 464,976 1,291,761
Expenses resulting from Investigation 86,500 -
Expenses relating to closing Roslyn office 551,170 -
Other general and administrative 819,842 1,439,622
----------- -----------
Total expenses $ 4,536,443 $15,761,019
=========== ===========
Cost of sales - residential rehabilitation properties decreased $7.9
million, or 82%, to $1.7 million for the quarter ended September 30, 2000 from
$9.6 million for the quarter ended September 30, 1999. This decrease was the
result of the decrease in the number of properties sold in the quarter ended
September 30, 2000 compared to the quarter ended September 30, 1999.
Compensation and benefits decreased $2.5 million, or 74%, to $963,000 for
the quarter ended September 30, 2000 from $3.4 million for the quarter ended
September 30,1999. This decrease was primarily due to decreased sales salaries
and commissions, which are based substantially on mortgage loan originations,
and the reductions in staff at the Company's Roslyn and New Jersey locations.
Total personnel decreased to 40 employees at September 30, 2000 from 172 at
September 30, 1999.
Interest expense decreased $827,000, or 64%, to $465,000 for the quarter
ended September 30, 2000 from $1.3 million for the quarter ended September 30,
1999. This decrease was primarily attributable to the decrease in mortgage
originations and a decrease in the amount of time a loan is held before being
sold to the final investor 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
$87,000 for the three-month period ended September 30, 2000. These expenses
primarily include legal fees incurred by the Company in connection with its
criminal defense attorneys.
Expenses relating to closing the Roslyn office include termination and
broker costs for the settlement with the landlord to terminate the lease,
writeoffs of leasehold improvements and capitalized costs in relation to the
office space, losses on sales of furniture and equipment and severance costs for
terminated employees.
Other general and administrative expenses decreased $620,000, or 43%, to
$820,000 for the quarter ended September 30, 2000 from $1.4 million for the
quarter ended September 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.
The Company believes that, as a result of certain cost cutting initiatives
and contraction of business expansion in the first three quarters of 2000,
expenses will decrease.
The net loss of $1.850 million for the quarter ended September 30, 2000 was
a decrease of $1.858 million from the net income of $8,000 for the quarter ended
September 30, 1999.
Nine months ended September 30, 2000 Compared to Nine months ended September 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 nine months ended September 30, 2000. The following
actions were taken:
o In a continuing effort to reduce the Company's overhead and expenses
and achieve profitability, PMCC Mortgage Corp. at its Board of
Directors meeting on September 18, 2000 determined that on October 1,
2000, the Company would permanently close its office in Roslyn
Heights, NY. PMCC Mortgage Corp. and PMCC Financial Corp. has
relocated their corporate offices to the location of the existing
branch office and former corporate office at 1767 Morris Avenue,
Union, NJ 07083. In conjunction with this closing, the Company has
negotiated with its landlord at 3 Expressway Plaza to terminate the
remaining 4.5 years of its lease at that location. Certain
post-closing and administrative functions are being absorbed by the
existing personnel in the Company's New Jersey and Florida locations.
The cost for terminating employees and the lease in Roslyn is
approximately $550,000 which is included in the third quarter
financials. After all reductions noted herein, it is anticipated that
the Company will experience annualized cost savings of approximately
$1.5 million. The Company's Roslyn retail office and administrative
offices had previously been reduced in January 2000 from 86 employees
to 45 and again in June 2000 to 17.
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
36 in September 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:
Nine months ended September 30,
------------------------------
2000 1999
---- ----
Sales of residential rehabilitation properties $16,143,462 $29,325,884
Gains of sales of mortgage loans, net 2,412,274 11,617,022
Loss on sale of delinquent loans (900,000) -
Interest earned 1,231,358 3,657,636
---------- -----------
Total revenues $18,887,094 $44,600,542
=========== ===========
Revenues from the sale of residential rehabilitation properties decreased
$13.2 million, or 45%, to $16.1 million for the nine months ended September 30,
2000 from $29.3 million for the nine months ended September 30, 1999. The number
of residential rehabilitation properties sold was 116 for the nine months ended
September 30, 2000 compared to 178 for the nine months ended September 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 $9.2 million, or 79%, to $2.4
million for the nine months ended September 30, 2000 from $11.6 million for the
nine months ended September 30, 1999. This decrease was due to a number of
significant factors. Mortgage loan originations were $158.3 million and $449.2
million for the nine months ended September 30, 2000 and 1999, respectively.
This 65% 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 nine months ended September 30, 2000, approximately 30% of
the Company's mortgage originations were derived from its retail mortgage
operations and approximately 70% from its wholesale operations, compared to 56%
retail and 44% wholesale for the nine months ended September 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 $575,000 for the nine months
ended September 30, 2000 compared to the nine months ended September 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 nine months ended September 30, 2000,
this resulted in approximately a 0.75% loss in revenue per loan or $1.1 million
in total compared to the nine months ended September 30, 1999. Additionally, in
past years, sub-prime loans were generally sold at a higher per loan margin than
conventional loans. Discontinuing sub-prime loan originations reduced gains by
approximately $1.2 million for the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999.
The following table summarizes the Company's mortgage originations (in
millions):
Nine months ended September 30,
-------------------------------
2000 1999
---- ----
Conventional $142,877 $300,619
FHA/VA 15,386 136,037
Subprime - 12,559
-------- --------
Total $158,263 $449,215
======== ========
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 nine months ended September
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 nine 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 $2.5 million, or 68%, to $1.2 million for the
nine months ended September 30, 2000 from $3.7 million for the nine months ended
September 30, 1999. This decrease was primarily due to decreased mortgage
originations for the nine months ended September 30, 2000 as compared to the
nine months ended September 30, 1999 and the elimination of sub prime mortgage
originations which generally are at higher rates and are held for sale longer
than conventional mortgage originations. Additionally, there was a decrease in
the amount of time a loan is held before being sold to the final investor. This
more rapid turnover allows the Company to utilize a lower warehouse line.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months ended September 30,
-------------------------------
2000 1999
---- ----
Cost of sales-residential rehabilitation properties $15,838,998 $26,565,987
Compensation and benefits 4,313,868 9,023,859
Interest expense 1,537,155 3,490,676
Expenses resulting from Investigation 1,577,400 --
Expenses relating to closing Roslyn office 551,170 --
Other general and administrative 2,903,507 3,803,102
----------- -----------
Total expenses $26,722,098 $42,883,624
=========== ===========
</TABLE>
Cost of sales - residential rehabilitation properties decreased $10.8
million, or 41%, to $15.8 million for the nine months ended September 30, 2000
from $26.6 million for the nine months ended September 30, 1999. This decrease
was the result of the decrease in the number of properties sold in the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999.
Compensation and benefits decreased $4.7 million, or 52%, to $4.3 million
for the nine months ended September 30, 2000 from $9.0 million for the nine
months ended September 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 40
employees at September 30, 2000 from 172 at September 30, 1999.
Interest expense decreased $2.0 million, or 57%, to $1.5 million for the
nine months ended September 30, 2000 from $3.5 million for the nine months ended
September 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 and a
decrease in the amount of time a loan is held before being sold to the final
investor
As a result of the Investigation, the Company incurred direct expenses of
$1.6 million in the nine-month period ended September 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.
Expenses relating to closing the Roslyn office include termination and
broker costs for the settlement with the landlord to terminate the lease,
writeoffs of leasehold improvements and capitalized costs in relation to the
office space, losses on sales of furniture and equipment and severance costs for
terminated employees.
Other general and administrative expense decreased $900,000, or 24%, to
$2.9 million for the nine months ended September 30, 2000 from $3.8 million for
the nine months ended September 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.
The Company believes that, as a result of certain cost cutting initiatives
and contraction of business expansion in the first nine months of 2000, expenses
will decrease.
The net loss of $6.7 million for the nine months ended September 30, 2000
was a decrease of $7.7 million or 670%, from the net income of $1.0 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 the warehouse
lines of credit at September 30, 2000 was $16.3 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. The
balance remaining on this line of $489,000 at November 8, 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 December 15, 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.
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 and next
year provided all new loans are sold to investors on a loan by loan basis. At
this time, the Company has no other lines of credit or sources to fund the
closing of its mortgage loans. 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 nine months of
2000 imposed by the increased capital requirements and Amendment Fees for its
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. In a continuing
effort to reduce the Company's overhead and expenses and achieve profitability,
PMCC determined that on October 1, 2000, the Company would permanently close its
office in Roslyn Heights, NY. The Company has relocated their corporate offices
to the location of the existing branch office and former corporate office in New
Jersey. In conjunction with this closing, the Company has negotiated with its
landlord in Roslyn to terminate the remaining 4.5 years of its lease at that
location. The cost for terminating employees and the lease in Roslyn is
approximately $500,000 which is included in the third quarter financials. After
all reductions noted herein, it is anticipated that the Company will experience
annualized cost savings of approximately $1.5 million. 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 along with the
effect of the purchase of the Company's stock by IBUI and resultant merger, or a
similar agreement, are expected to be sufficient to fund its current mortgage
banking operation during 2000 and 2001 and to ensure the ongoing viability of
the Company. Such a merger would increase the Company's capital base, improve
the combined balance sheet and allow the Company to seek additional warehouse
lines of credit, raise additional capital or issue debt securities.
Net cash provided by operations for the nine months ended September 30,
2000 was $33.3 million. The Company generated cash from the $26.8 million
decrease in mortgage loans held for sale and receivable from sales of loans and
by a $13.9 million net decrease in residential rehabilitation properties. The
Company used cash to reduce borrowings under its warehouse lines of credit by
$34.2 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 September 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
Dated July 28, 2000 filed August 21, 2000.
Dated September 18, 2000 filed September 29, 2000.
<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 and Chief
Executive Officer
By:Stephen J. Mayer
------------------------------
Stephen J. Mayer
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 17, 2000
