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 March 31, 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 May 8, 2000: 3,707,000 shares.
<PAGE>
PMCC FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page No
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<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Statements of Operations (Unaudited) 3
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Financial Condition (Unaudited) 4
March 31, 2000 and December 31, 1999
Consolidated Statements of Cash Flows (Unaudited) 5
Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-18
and Results of Operations
Part II - Other Information 19-20
Signatures 21
</TABLE>
2
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
PMCC FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------------------
<S> <C> <C>
Revenues:
Sales of residential rehabilitation properties $9,922,201 $8,544,978
Gains on sale of mortgage loans, net 1,048,985 3,807,903
Interest earned 570,886 1,319,435
---------- ---------
11,542,072 13,672,316
Expenses:
Costs of sales, residential rehabilitation properties 9,472,931 7,804,194
Compensation and benefits 1,891,804 2,730,631
Interest expense 693,854 1,179,956
Expenses resulting from Investigation (Note 7) 1,145,256 -
Other general and administrative 1,035,058 1,155,644
---------- ----------
14,238,903 12,870,425
(Loss) income before income tax (benefit) expense (2,696,831) 801,891
Income tax (benefit) expense (1,109,247) 329,000
----------- -------
Net (loss) income $(1,587,584) $472,891
============ ========
Net (loss) income per share of common stock-basic $(0.43) $0.13
====== =====
Net (loss) income per share of common stock-diluted $(0.43) $0.13
======= =====
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 3,756,571
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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PMCC FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
Unaudited Audited
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $549,105 $214,957
Restricted cash 500,000 500,000
Receivable from sales of loans - 4,300,279
Mortgage loans held for sale, net 14,798,335 36,666,397
Mortgage loans held for investment, net 3,323,879 3,112,179
Accrued interest receivable 125,000 125,000
Other receivables, net 1,920,417 1,396,756
Residential rehabilitation properties, net 7,414,997 15,189,753
Furniture, fixtures & equipment, net 1,104,886 1,169,327
Prepaid expenses and other assets 1,206,847 870,875
--------- ----------
Total assets $30,943,466 $63,545,523
=========== ===========
Liabilities and shareholders' equity Liabilities:
Notes payable-principally warehouse lines of credit $20,332,379 $50,584,370
Deferred income taxes - 333,000
Accrued expenses and other liabilities 1,084,079 1,531,374
--------- ---------
Total liabilities 21,416,458 52,448,744
---------- ----------
Shareholders' equity
Common stock 37,500 37,500
Additional paid-in capital 10,935,096 10,917,283
Retained (deficit) earnings (1,191,117) 396,467
Treasury stock (254,471) (254,471)
--------- ---------
Total shareholders' equity 9,527,008 11,096,779
--------- ----------
Total liabilities and shareholders' equity $30,943,466 $63,545,523
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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PMCC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,587,584) $472,891
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 (449,270) (740,784)
Proceeds from sales of properties 9,922,201 8,544,978
Costs of properties acquired (1,698,175) (9,278,538)
Depreciation and amortization 90,611 61,032
(Increase) decrease in interest and other receivables (523,661) 81,477
Decrease in mortgage loans held for sale and investment, net 21,656,362 14,580,818
Decrease in receivable from sales of loans 4,300,279 16,257,489
Increase in prepaid expenses and other assets (335,972) (72,884)
Decrease in deferred taxes payable (333,000) (213,000)
(Decrease) increase in accrued expenses and other liabilities (447,295) 143,344
--------- -------
Net cash provided by operating activities 30,594,496 29,836,823
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (8,357) (32,788)
------- --------
Net cash used in investing activities (8,357) (32,788)
------- --------
Cash flows from financing activities:
Net decrease in notes payable-warehouse lines of credit (30,251,991) (30,348,848)
Net decrease in due to affiliates -- (1,187,998)
Distributions to S corporation shareholders -- (277,700)
----------- ---------
Net cash used in financing activities (30,251,991) (31,814,546)
------------ ------------
Net increase (decrease) in cash and cash equivalents 334,148 (2,010,511)
Cash and cash equivalents at beginning of period 214,957 3,596,002
--------- ---------
Cash and cash equivalents at end of period $549,105 $1,585,491
======== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $970,048 $1,297,371
======== ==========
Income taxes $11,190 $55,000
======= =======
Loans transferred from mortgage loans held for sale to
held for Investment, net $322,100 $29,649
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
PMCC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 months ended March 31, 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.
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.
6
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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 0
shares and 93,335 shares, respectively, for the three months ended March 31,
2000 and 1999.
5. Notes Payable
At March 31, 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. To
supplement the IMPAC Line, in March 2000, the Company applied for additional
warehouse lines of credit totaling $15 million with two other financial
institutions.
The expiration dates for the Company's warehouse lines of credit with Bank
United and GMAC/RFC have been extended to May 31, 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 June 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 these lines at May
11, 2000 is approximately $5.4 million.
7
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6. Related-Party Transactions
A relative of Ronald Friedman, the Company's President and CEO currently on a
leave of absence, has an economic interest in a rehab partner for the purchase
and sale of rehabilitation properties with a subsidiary of PMCC. At March 31,
2000, the subsidiary owned $1.338 million of properties with outstanding
borrowings on the Company's warehouse lines of $822,000 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
8
<PAGE>
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 7% of its current
loan volume through FHA products.
As a result of this investigation, the Company incurred $1.145 million of direct
expenses for the three months ended March 31, 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.
8. 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)
Quarter Ended March 31,
-----------------------
2000 1999
---- ----
Revenues:
Residential rehabilitation properties $ 9,922 $ 8,545
Mortgage banking 1,620 5,127
-------- --------
$ 11,542 $ 13,672
======== ========
Less: (1)
Expenses allocable to residential rehabil-
itation properties (cost of sales, interest
expense and compensation and benefits) 10,119 8,265
Expenses allocable to mortgage banking
(all other) 4,120 4,605
-------- --------
$ 14,239 $ 12,870
======== ========
Operating (Loss) Profit:
Residential rehabilitation properties (197) 280
Mortgage banking (2,500) 522
-------- --------
$ (2,697) $ 802
======== ========
9
<PAGE>
Identifiable Assets (at March 31, 2000 and
December 31, 1999, respectively):
Residential rehabilitation properties $ 7,415 $ 15,190
Mortgage banking 23,528 48,356
-------- ---------
$30,943 $ 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.
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.
10
<PAGE>
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 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 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 quarter ended March 31, 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 conjunction such reduction, the
Company is currently negotiating to significantly reduce its office space
in Roslyn by subleasing at least half its current premises. These
reductions, while costing an estimated $300,000 in termination costs, are
expected to result in annualized cost savings of almost $1.6 million;
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. It is expected that these actions will result in
annualized cost savings to the Company of approximately $800,000, while
closing these branches resulted in estimated closing and termination costs
of $75,000;
o staffing at the Company's New Jersey and remaining Florida wholesale
locations was reduced from 61 employees to 38, and the Florida locations
have moved to more cost-efficient office locations. These reductions are
expected to result to result in annualized cost savings of almost $600,000;
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. It is expected that
this action will result in annualized savings of over $300,000;
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. Assuming successful
completion of proposed sales, this process is expected to bring into the
Company a total of approximately $6 million in cash by the end of June
2000.
11
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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 plans to add 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. The Company
also expects to reopen and expand its web-site to allow borrowers to directly
match their credit profile to specific products and rates offered by the
Company.
The Company also expects to resume its residential rehabilitation
activities when condition are favorable and is exploring new financing sources.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Quarters Ended March 31,
------------------------
2000 1999
------------------
Sales of residential rehabilitation properties $ 9,922,201 $ 8,544,978
Gains of sales of mortgage loans, net 1,048,985 3,807,903
Interest earned 570,886 1,319,435
----------- -----------
Total revenues $11,542,072 $13,672,316
=========== ===========
Revenues from the sale of residential rehabilitation properties increased
$1.4 million, or 16%, to $9.9 million for the quarter ended March 31, 2000 from
$8.5 million for the quarter ended March 31, 1999. The number of residential
rehabilitation properties sold was 75 for the quarter ended March 31, 2000
compared to 52 for the quarter ended March 31, 1999. This increase was a result
of the Company's initiative to sell completed properties on hand as quickly as
practicable to enhance cash flow.
Gains on sales of mortgage loans decreased $2.8 million, or 74%, to $1.0
million for the quarter ended March 31, 2000 from $3.8 million for the quarter
ended March 31, 1999. This decrease was due to a number of significant factors.
Mortgage loan originations were $59.5 million and $133.9 million for the
quarters ended March 31, 2000 and 1999, respectively. This 56% 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 March 31, 2000, approximately 42% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
58% from its wholesale operations. 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 $800,000 for the three-months ended March 31, 2000 compared to the
three-months ended March 31, 1999.
12
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The following table summarizes the Company's mortgage originations (in
millions):
Quarters Ended March 31,
------------------------
2000 1999
---------------
Conventional $ 48,118 $ 88,734
FHA/VA 11,373 38,832
Subprime -- 6,334
-------- --------
Total $ 59,491 $133,900
======== ========
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 $749,000, or 57%, to $571,000 for the quarter
ended March 31, 2000 from $1.3 million for the quarter ended March 31, 1999.
This decrease was primarily due to decreased mortgage originations for the
quarter ended March 31, 2000 as compared to the quarter ended March 31, 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:
<TABLE>
<CAPTION>
Quarters Ended March 31,
------------------------
2000 1999
---- ----
<S> <C> <C>
Cost of sales - residential rehabilitation properties $ 9,472,931 $ 7,804,194
Compensation and benefits 1,891,804 2,730,631
Interest expense 693,854 1,179,956
Expenses resulting from Investigation 1,145,256 --
Other general and administrative 1,035,058 1,155,644
----------- -----------
Total expenses $14,238,903 $12,870,425
=========== ===========
</TABLE>
Cost of sales - residential rehabilitation properties increased $1.7
million, or 22%, to $9.5 million for the quarter ended March 31, 2000 from $7.8
million for the quarter ended March 31, 1999. This increase was the result of
the increase in the number of properties sold in the quarter ended March 31,
2000 compared to the quarter ended March 31, 1999.
Compensation and benefits decreased $839,000, or 31%, to $1.9 million for
the quarter ended March 31, 2000 from $2.7 million for the quarter ended March
31,1999. 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 86 employees at March 31,
2000 from 155 at March 31, 1999.
Interest expense decreased $486,000, or 41%, to $694,000 for the quarter
ended March 31, 2000 from $1.2 million for the quarter ended March 31, 1999.
This decrease was
13
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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
$1.1 million in the three-month period ended March 31, 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 $121,000, or 10%, to
$1.0 million for the quarter ended March 31, 2000 from $1.2 million for the
quarter ended March 31, 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 quarter of 2000, expenses will decrease. However, such decreases
are expected to continue to be partially offset by professional fees and other
expenses as a result of the Investigation and related events.
The net loss of $1.5 million for the quarter ended March 31, 2000 was a
decrease of $1.0 million or 211%, from the net income of $473,000 for the
quarter ended March 31, 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 March 31, 2000 was $17.9 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
14
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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 have agreed to continue to extend the line on a specified
declining basis through a series of short-term extensions. The banks and PMCC
are in the process of extending the Chase Line through June 15, 2000, at which
time the Company anticipates paying down the entire facility or renewing the
extension under similar terms and conditions as the extensions granted since
December 24, 1999. 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 has agreed to
continue to extend the line on a declining basis through a series of short term
extensions, the most recent of which will expire on May 31, 2000, at which time
the Company anticipates paying down the entire facility or renewing the
extension under similar terms and conditions as the extensions granted since
January 31, 2000. Interest payable on the RFC Line is variable based on LIBOR
plus 1.35% 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.
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,
15
<PAGE>
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. On March 1, 2000, Bank United agreed to
an extension through March 31, 2000 on similar terms, with a reduction of the
commitment from $20 million on March 13 to $13 million on March 31. Additional
collateral held was returned in proportion to the reduction in the amount
committed. On April 1, 2000, Bank United agreed to an extension on similar terms
with a reduction of the commitment to $7 million through April 30, 2000. On
April 25, 2000, Bank United agreed to an extension on similar terms through May
15, 2000 and on May 9, 2000, the bank agreed to a verbal extension on similar
terms through May 31, 2000, at which time the Company anticipates paying down
the entire facility or renewing the extension under similar terms and conditions
as the extensions granted since January 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. To supplement the
IMPAC Line, in March 2000, the Company applied for additional warehouse lines of
credit totaling $15 million with two other financial institutions. There can be
no assurance that such applications will be approved.
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, the additional lines
applied for would be required.
The Company supplemented its warehouse facilities through a gestation
agreement with Prudential Securities Corp. (the "Gestation Agreement"), which
for financial reporting was characterized by the Company as a borrowing
transaction. Due to the events regarding the Investigation, on December 22, 1999
Prudential suspended funding new loans under the agreement. As of March 21,
2000, all loans funded under the Gestation Agreement have been sold to the final
investors. The Company believes that other financial institutions provide
similar gestation lines of credit, although there can be no assurance that the
Company will obtain a new gestation line of credit.
16
<PAGE>
The Company had additional cash requirements in the first quarter 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, resulting in estimated annualized cost savings of
approximately $3.3 million. 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. The Company believes that, if such applications are
approved, the additional $15 million of warehouse lines for which the Company
has applied would enable PMCC to hold loans in the warehouse longer, thereby
permitting the Company to sell loans in bulk and to hedge its inventory of
loans, resulting in potentially higher margins on loan sales.
Net cash provided by operations for the quarter ended March 31, 2000 was
$30.6 million. The Company generated cash from the $29.5 million decrease in
mortgage loans held for sale and receivable from sales of loans and by a $7.8
million net decrease in residential rehabilitation properties. The Company used
cash to reduce borrowings under its warehouse lines of credit by $30.3 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.
Year 2000 Compliance
PMCC had planned for and addressed the Year 2000 ("Y2000") issue to ensure
it would be able to continue to perform its critical functions. The Company's
information technology infrastructure was evaluated for the Y2000 compliance.
The Company has
17
<PAGE>
contacted the vendors of its information systems and has been informed that
these systems were Y2000 compliant. The Company's workstations and fileservers
were substantially Y2000 compliant and those workstations that were not Y2000
compliant were replaced during 1999. The cost to modify the Company's
information technology infrastructure was not material to its financial
condition or results of operations. The Company also relies, directly and
indirectly, on other businesses such as third party service providers,
creditors, financial institutions and governmental entities. Even though the
Company's computer systems are not materially adversely affected by the Y2000
issue, the Company's business and operations could have been materially
adversely affected by disruptions in the operations of other entities with which
the Company interacts.
Upon the turn of the millennium and subsequent thereto, the Company did not
experience any significant systems malfunctions related to the Y2000 issue.
Additionally, the Company did not experience any Y2000 issues with any other
businesses that it relied upon to provide services to the Company. Although the
Company does not anticipate any future systems malfunctions related to the Y2000
issue, procedures are in place to continuously monitor all critical systems to
ensure that any potential Y2000 issue that arises is corrected with minimal or
no disruption to the Company's operation.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
None.
18
<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
19
<PAGE>
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 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.
20
<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 /s/ Keith Haffner
-----------------
Keith Haffner
Interim Chief Executive Officer
By /s/ Stephen J. Mayer
--------------------
Stephen J. Mayer
Chief Financial Officer
(Principal Accounting Officer)
Dated: May 12, 2000
g 21
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